In March 2016, the BoE launched its 2016 stress test of the UK banking system, which covered 7 major banks accounting for around 80% of Prudential Regulation Authority (PRA)-regulated banks’ lending to the UK real economy.
The stress test, which is the first conducted under the BoE’s new approach to stress testing, examined the resilience of the system to a more severe stress than in 2014 and 2015. The 2016 stress test incorporated a synchronised UK and global recession with associated shocks to financial market prices, and an independent stress of misconduct costs.
In this context, the Bank of England published in November the 2016 stress test results of the UK banking system. These results include aggregated data and also the individual results of the 7 banks participating in the exercise.
Overall, the stress scenario is estimated to lead to system-wide losses of £44 billion over the first two years of the stress, around five times the net losses incurred by the same banks as a group over 2008–09. Moreover, the 2016 stress scenario would reduce the aggregate CET1 capital ratio across the seven participating banks from 12.6% at the end of 2015 to a low point of 8.8% in 2017. In any case, the BoE judged that the UK banking system is in aggregate capitalised to support the real economy in a stress scenario.
This document prepared by the R&D area of Management Solutions analyses the main results of the 2016 stress test.
In this stress test 7 banks participated. Performance was assessed against the BoE’s hurdle rate framework, comprising elements expressed both in terms of risk-weighted capital and leverage ratios.
Scope of application
7 banks accounting for around 80% of PRA-regulated banks’ lending to the UK real economy.
- Lloyds Banking Group
- Royal Bank of Scotland Group
- Santander UK
- Standard Chartered
- Capital: the stress scenario would reduce the aggregate CET1 capital ratio from 12.6% at the end of 2015 to a low point of 8.8% in 2017, after factoring in the management actions, including the conversion of AT1 instruments. At an individual level, the impact differs across banks.
- Leverage: in the stress scenario, the aggregate leverage ratio (LR) would be reduced to a low point of 3.9%. Thus, it would be above the hurdle rate and also above the average systemic reference point. RBS is the only institution that does not meet the hurdle rate.
- Conclusions: the BoE judges that the UK banking system is capitalised. At individual level, HSBC, Lloyds, Nationwide and Santander UK do not have capital inadequacies; whereas RBS, Barclays and Standard Chartered need to take certain actions.
Download the technical note by clicking here.