Britain’s eight biggest banks have undergone the first of the Prudential Regulation Authority’s annual stress tests. Their balance sheets (as of the end of 2013) were tested against a three-year disaster scenario that saw house prices slide 35%; the Bank of England’s main interest rate shoot up to 4%, due to rising inflation; GDP slide by 3.5%; and sterling tank by 20%. The Co-op, as expected, failed the test, as its capital was wiped out by the hypothetical crash.
What the commentators said
The UK’s banks suffered the equivalent of a heart attack in 2008, said Anthony Hilton in the Evening Standard. After a cardiac arrest, “it can take years of recuperation” before it is possible to lead a normal life. Now, six years on, banks “are a lot healthier” – but they are still not quite as strong as the Bank of England would like.
“We’re not out of the woods yet,” agreed James Moore in The Independent. The stress test was hardly extreme – it was no 2008 crisis – yet two banks still failed.
Sure, it was well known that the Co-op would fail – it has a big black hole in its accounts and needs to raise capital. But RBS only passed because it beefed up its capital-raising plans while the stress tests were still ongoing.
However, at least it did something; the Co-op just said it would fail, then focused on “re-jigging its long-term incentive plan so its top people could still get paid”.
Investors should also note that since both RBS and Lloyds only just passed, it could take them some time before they start paying dividends again.
The upshot, reckoned Mike Trippitt of Numis, is that another financial crisis would still leave the taxpayer on the hook. Crises rarely strike in the same place twice, however. Since these tests were devised, noted the FT’s Jonathan Guthrie, oil has tanked, and everyone is thinking about the potential collateral damage.
Banks could face losses on the junk bonds issued by shale producers, for instance. So bear in mind that the stress tests encompassed “an economic backdrop that no longer exists”.