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BoE To Release Stress Test Results By End Of Week

Bank of EnglandThe Bank of England (BOE) is expected to release the results of the latest round of stress tests it has carried out on top British banks before the end of this week. The tests were carried out to check the resilience and strength of the financial system in case of a global economic shock.

A new measure has been included in this round, making it the toughest one yet. The BOE has so far conducted three stress tests. The first round of tests took place in 2008 and the next was in 2015. Bank of England governor Mark Carney had said of the 2015 results that all large lenders were ready to face global economic pressures.

The banks undergoing the tests this time are HSBC, Barclays, Royal Bank of Scotland, Lloyds Banking Group, the UK division of Santander as well as Standard Chartered. The BOE will in particular be evaluating the results for effectiveness in managing housing risks. According to the new test requirement, every bank must perform well on its own hurdle rate and also on the new threshold limit called the systemic reference point which checks for the repercussions in case the lender collapses. If any bank falls short in either of the measures, it will need to boost capital ratios.

Bank of England

The scenario being tested by the BOE is of a worldwide downturn where the global economy is down by 1.9 percent with domestic situation facing a 31 percent fall in housing prices, 42 percent drop in commercial properties and overall economy declining by 4.3 percent while unemployment is up by 4.5 percent. Additionally the dollar is rising against the currencies of emerging markets and oil is at $20 per barrel.

According to analysts most banks will meet the lowest bar limit set by the tests, but several might soft fail the new tougher measure. In particular, many suspect that the Chinese downturn scenario might cause HSBC Holdings Plc and Standard Chartered Plc to perform poorly.

In a statement, Robert Noble, an analyst at investment firm RBC said

We see some risk of a soft fail at both banks despite high starting capital ratios. There is a risk for both of these banks that the BOE increases the losses on Chinese and Chinese-linked exposures.

The Royal Bank of Scotland Group Plc and Barclays Plc are also expected to struggle to meet the new measure. RBS is already on a weak wicket given that it showed large capital losses during the recently concluded European Central Bank-held stress tests and therefore might see poor results here as well.


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