In March 2017, the BoE launched its 2017 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 2017 stress test includes for the first time a biennial exploratory scenario (BES) alongside the annual cyclical scenario (ACS). In this regard, the ACS is more severe than the global financial crisis (UK GDP falls by 4.7%, UK residential property prices fall by 33%, UK bank rate rises and peaks at 4%, etc.) whereas the BES examines major UK banks’ long term strategic responses to an extended low growth, low interest rate environment with increasing competitive pressures in retail banking enabled in part by an increase in the use of financial technology (FinTech).

In this context, the BoE published in November the 2017 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 bank’s losses of £50 billion in the first two years of the stress1. The stress test shows these losses can now be absorbed within the buffers of capital banks have on top of their minimum requirements. Moreover, the 2017 stress scenario would reduce the aggregate CET1 capital ratio across the 7 participating banks from 13.4% at the end of 2016 to a low point of 8.3% in 2018, and 13.0% in 2021. In any case, the BoE judged that no bank needs to strengthen its capital position as a result of the stress test. The 2017 stress test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs.

This document prepared by the R&D area of Management Solutions analyses the main results of the 2017 stress test.

Executive summary

In this stress test 7 banks participated. Performance was assessed according to the 2017 ACS and 2017 BES, addressing projections on the economic situation in UK.

Scope of application

7 banks accounting for around 80% of PRA-regulated banks’ lending to the UK real economy.

  • Barclays
  • HSBC
  • Lloyds Banking Group
  • Nationwide
  • Royal Bank of Scotland Group
  • Santander UK
  • Standard Chartered

Main content

  • 2017 ACS - Capital: the stress scenario would reduce the aggregate CET1 capital ratio from 13.4% at the end of 2016 to a low point of 8.3% in 2018, after factoring in the management actions, including the conversion of AT1 instruments. At an individual level, the impact differs across banks.
  • 2017 ACS - Leverage: in the stress scenario, the aggregate leverage ratio (LR) would be reduced to a low point of 4.3%. Thus, it would be above the hurdle rate and also above the average systemic reference point. At individual level, all banks meet the hurdle rate and the systemic reference point.
  • 2017 ACS - Contributions to the shortfall of CET1 and LR (e.g. net interest income expenses and taxes, impairments, etc.).
  • 2017 ACS Conclusions: banks incur losses of around £50 billion in the first two years of the stress which can now be absorbed within the capital buffers. Due to these losses, the system‑wide UK countercyclical capital buffer rate has been increased to 1%.
  • 2017 BES - Bank´s projections: the bank’s projection under the 2017 BES reflects the horizon 2016-2023 and covers the RoE, CoE, net interest margin, annual profits, loan volumes, market share, non-interest income, capital and liquidity ratios, and risks to bank’s projections.
  • 2017 BES - Conclusions: in aggregate, participating banks project that they could adapt to a low rate, low growth macroeconomic environment without major strategic change or taking on more risk.

Download the technical note by clicking here.