The Bank’s Financial Policy Committee (FPC) confirmed today it will put the UK’s seven biggest banks and building societies through an additional round of scenarios to check how their balance sheets would perform in exceptional circumstances, meaning financial institutes will face two separate sets of probing from the Old Lady in 2017.
The extra tests, proposed last October, will sit alongside the regular annual stress tests which assess how banks would perform if the financial cycle quickly took a turn for the worse. The new “biennial exploratory scenario” is designed to complement these, and will deal with longer-term structural changes banks might face, such as persistently low deflation or other factors which are not “neatly linked to the financial cycle”.
The Bank also confirmed the results of the 2016 stress tests, which will look at how banks would handle cyclical factors including a crash in real estate prices, a sharp recession in the UK, a spike in unemployment to nearly ten per cent, $20 a barrel oil prices, and a worldwide contraction, will be published at the end of November.
The exact details of the new stress test will be announced in March 2017.
Only the major UK-headquartered lenders are assessed under the Bank of England’s stress tests - Barclays, HSBC, Lloyds, Nationwide, RBS, Santander and Standard Chartered. With other regulators, such as the European Central Bank (ECB) and the US Federal Reserve, testing the resolve of beleaguered institutions such as Deutsche Bank and Credit Suisse which operate in the UK.
Over the course of 2016 several institutions including the International Monetary Fund (IMF), the ECB and the Bank of England, on occasions, have raised concerns about how banks are dealing with the low interest rate environment - something which annual cyclical stress tests may not be able to capture sufficiently.
The IMF found one-third of Europe’s banks will struggle to make a profit unless they change their business models. In their assessment, UK lenders fared better than some of their Eurozone partners, although with interest rates having been cut to a fresh all-time low of 0.25 per cent in the wake of the EU referendum, banks’ UK operations have come under renewed pressure.
At the latest meeting of the Monetary Policy Committee (MPC) in mid-September the Bank indicated it was still on course to cut interest rates again later this year in order to cushion the UK economy from the fallout from the surprise Brexit vote. Initially, the Bank had expected growth to come in just above zero for the final six months of 2016, although it now expects an expansion of around 0.3 per cent in the third quarter, given the stream of robust post-23 June data which has materialised.
More recent comments from MPC members, including Carney’s key ally Minouche Shafik, indicate the Bank is sticking by its commitment to take interests to just above zero in either November or December. However, the recent upwards revision to the UK’s GDP growth in the second quarter and continued strong indications of how the mighty services industry is performing have led analysts to question whether the Bank will act.