UK Largest Banks To Face “Extreme” Stress Test
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U.K.’s central bank, the Bank of England, has ordered eight of the nation’s largest financial institutions to undergo an “extreme” stress test, which will test if they are strong enough to withstand a potential economic shock similar to conditions in the aftermath of World War I.
U.K.’s central bank, the Bank of England, has ordered eight of the nation’s largest financial institutions to undergo an “extreme” stress test, which will test if they are strong enough to withstand a potential economic shock similar to conditions in the aftermath of World War I.
According to the BBC, the banks will be required to show they can survive when facing a scenario of house prices falling 35 percent, unemployment rising to 12 percent, inflation going up to about 6.5 percent and interest rates jumping to as much as 4 percent.
The stress test, which will be imposed on top of the European Union’s own exercise, will be conducted over the summer and autumn and concluded by the end of the year.
Mark Carney, the governor of the Bank of England, said that the test would ensure that banks could withstand any crisis.
[quote]”Although the events depicted in this stress-test scenario are extreme, and thus highly unlikely to transpire, by bringing together the micro-prudential standards for banks with a macro-prudential assessment of the tail risks to which they must be resilient, the Bank of England is working to ensure that the UK financial system remains one that absorbs rather than amplifies shocks,” Carney said.[/quote]If any banks fail the test, they could be required to raise more capital, lower dividends or clamp down on remuneration, Carney added.
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Among those to be tested include HSBC, Barclays, Lloyds Banking Group, the Royal Bank of Scotland, Standard Chartered, the UK arm of Santander and Co-op Bank. One building society, Nationwide, will also have its balance sheet strength scrutinised.
Many countries around the world have begun to impose stringent banking stress tests in the wake of the 2008 crisis.
Early tests were discovered to be too lenient after Ireland’s banks, for instance, were given a clean bill of health just before they ran out of capital.
