Threadneedle Street will announce the outcome of its annual health check of the six biggest banks – and one building society, Nationwide – on Wednesday, alongside its assessment of the major risks to the financial system in the wake of the Brexit result.
The Bank will also scrutinise the effectiveness of measures aimed at limiting the risks in the housing market. It has previously said it is concerned about the ability of some households to keep paying their debts if unemployment rises and wage growth stalls.
The results will be the focus for investors. The banks being tested are Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, the UK arm of Spanish bank Santander and Standard Chartered, which is based in London but has most of its activities in emerging markets.
The tests were introduced in the wake of the 2008 banking crisis and are based on hypothetical scenarios devised by the Bank. “In the Bank’s 2016 stress scenario vulnerabilities across financial markets and the global and UK economies crystallise,” the Bank said.
The test also incorporates projections for fines and other costs associated with misconduct, although the Bank said: “There remains a very high degree of uncertainty around any approach to quantifying misconduct cost risks facing UK banks.”
The Bank has set out an imaginary five-year period in which there is a “synchronised global downturn” under which the global economy contracts by 1.9% – as it did during the financial crisis. It has also incorporated domestic factors: a 31% fall in house prices, 42% reduction in commercial property prices with the economy contracting by 4.3% and unemployment rising by 4.5 percentage points. The dollar rises against emerging market currencies and the oil price troughs at $20 per barrel.
When the pan-European banking regulator, the European Banking Authority, published the results of its assessment on major lenders earlier this year, RBS took the biggest hit to its financial strength of any UK bank subjected to the health checks.
It is the third annual test by the Bank of England. In the first, run in 2014, the Bank had focused on risk to UK households while in 2015 on global risks, such as a contraction in China and parts of the eurozone.
The stress test results will be published at the same time that Carney sets out the issues monitored by the Bank’s financial policy committee, originally set up by the coalition government to try to avoid a rerun of the 2008 crisis.
The FPC has also said it will use its half-yearly financial stability report (FSR) to set out its review of the policy measures announced in June 2014 “to insure against the risk of a marked loosening in underwriting standards and a significant rise in the number of vulnerable households”.
At the time, the Bank set out measures to restrict lenders’ ability to lend more than 15% of their mortgages to customers needing to borrowing four and half times their income. It also toughened the test imposed on customers through the mortgage market review, which tests customers’ ability to repay their loans.
This article was written by Jill Treanor, for theguardian.com on Sunday 27th November 2016 15.05 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010