November 28, 2017

BoE announced the results of its 2017 stress test of the banking system in the UK. For the first time since this stress test was launched in 2014, 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. The economic scenario in the test is more severe than the global financial crisis. Significant improvements in asset quality since the crisis mean that the loss rate on banks’ loans in the stress test is the same as in the financial crisis. In the test, banks incur losses of nearly GBP 50 billion in the first two years of the stress. This scale of loss, relative to their assets, would have wiped out the common equity capital base of the UK banking system ten years ago. This stress test shows these losses can now be absorbed within the buffers of capital that banks have on top of their minimum requirements.

Overall, capital positions have strengthened considerably in the past decade. Banks started the test with, in aggregate, a tier 1 leverage ratio of 5.4% and a tier 1 risk‑weighted capital ratio of 16.4%. The aggregate common equity tier 1 (CET1) ratio was 13.4%—three times stronger than a decade ago. Even after the severe losses in the test scenario, the participating banks would, in aggregate, have a tier 1 leverage ratio of 4.3%, a CET1 capital ratio of 8.3% and a tier 1 capital ratio of 10.3%. They would, therefore, be able to continue to supply the credit the real economy could demand even in a very severe stress.


Related Link: Results of the 2017 Stress Test (PDF)

Keywords: Europe, UK, Banking, Stress Testing, Capital Buffers, CET1, BoE