By Max Colchester and Margot Patrick
The Bank of England on Tuesday said all but one of the U.K.'s
major banks passed a balance sheet health check.
The central bank's Prudential Regulation Authority put eight
U.K. lenders through a hypothetical three-year economic collapse.
To pass the test banks had to maintain a 4.5% ratio of capital to
risk adjusted assets throughout the period.
Only one bank, the Co-operative Bank, needed to submit a revised
plan to strengthen its balance sheet. Part state-owned Royal Bank
of Scotland Group PLC and Lloyds Banking Group PLC only narrowly
passed the test. Both need to improve their capital positions but
have already put in place plans to do so, the PRA said.
The stress test saw interest rates rise sharply to 4%, U.K.
gross domestic product fall to 3.5% below its fourth-quarter 2013
level, unemployment peak at 12% and commercial real-estate prices
slump 30%. The regulator had previously warned that if banks only
just pass the test, they could still be required to take action to
bolster their balance sheets.
The Co-operative Bank already flagged that it would probably
fail the balance-sheet check. The PRA on Tuesday said that the
Co-op registered a capital ratio of -2.6% after the test. The Co-op
Bank is working through a restructuring plan agreed with the
regulator following a bailout by bondholders and has agreed to
further shrink its balance sheet in particular cutting its mortgage
book, the PRA said. The bank will cut risk adjusted assets by
GBP5.5 billion ($8.51 billion) by the end of 2018.
RBS, which passed with a capital ratio of 5.2%, would have
normally been asked to submit a revised capital plan, the PRA said.
However, the 80% state-owned lender already agreed a restructuring
plan with the PRA this year so a new plan wasn't required. Lloyds,
which passed with a ratio of 5.3%, is generating capital and so
doesn't need to provide a new plan either. But it is unclear
whether Lloyds would get approval from the regulator to restart its
dividend payments.
The Bank of England said it "judged that the resilience of the
system had improved significantly since the capital shortfall
exercise in 2013." The regulator, however, raised questions about
all the banks' ability to provide accurate data to feed into the
test. All but one bank suffered from limitations in technology and
the number of personnel working on the project.
The test stressed the eight biggest U.K. lenders including HSBC
Holdings PLC, Barclays PLC, Royal Bank of Scotland Group PLC,
Lloyds Banking Group PLC, Standard Chartered PLC, Nationwide
Building Society and The Co-operative Bank.
The balance sheet check is likely to form the basis for annual
U.K. bank stress test.
Write to Max Colchester at max.colchester@wsj.com and Margot
Patrick at margot.patrick@wsj.com
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