Published: 02 Oct 2013
Last Updated: 02 Oct 2013
Bankers in the UK complain a lot about European regulations, but the real headache is increasingly coming from closer to home: the Bank of England, which has decreed that henceforth, big banks in the UK must undergo annual stress tests.
From next year, the Bank of England will scrutinise banks’ models in various hypothetical situations: what would happen, for example, if there was high unemployment, high inflation, low economic growth or a housing bubble took place. It’ll also look further afield: more crises in the eurozone, for instance, or a sudden drop in growth in Asia.
If banks fail the stress tests, they’ll be forced into taking measures such as rights issues, cutting dividends or selling up entire businesses. In the worst-case scenario, they could even be wound down.
And the Bank of England is being deliberately cagey about how its modeling system will work: while it is likely to publish criteria, it’s expected to keep the exact details secret so banks can’t manipulate the system. Not that it doesn’t trust them, of course…
Banks could be forgiven for rolling their eyes and sighing heavily, but actually they’re cautiously optimistic about the situation. In a statement this morning, the British Bankers’ Association said the plans would ‘reinforce confidence in the financial system by letting regulators make judgments that balance systemic stability with the need to support growth.’
Banks have previously been subject to stress test by the (now-scrapped) Financial Services Authority, but those were on an ad-hoc, rather than an annual, basis. Barclays, in particular, is still reeling after the Prudential Regulation Authority told it to bring its leverage ratio up to 3%, causing it to launch a £5.8bn rights issue.
If everything goes smoothly, this could provide a much-needed injection of good PR for an industry still dealing with the repercussions of various mishaps. Although, on the other hand, it could turn into a lot more bureaucratic box-ticking that won't necessarily prevent another crisis...
From next year, the Bank of England will scrutinise banks’ models in various hypothetical situations: what would happen, for example, if there was high unemployment, high inflation, low economic growth or a housing bubble took place. It’ll also look further afield: more crises in the eurozone, for instance, or a sudden drop in growth in Asia.
If banks fail the stress tests, they’ll be forced into taking measures such as rights issues, cutting dividends or selling up entire businesses. In the worst-case scenario, they could even be wound down.
And the Bank of England is being deliberately cagey about how its modeling system will work: while it is likely to publish criteria, it’s expected to keep the exact details secret so banks can’t manipulate the system. Not that it doesn’t trust them, of course…
Banks could be forgiven for rolling their eyes and sighing heavily, but actually they’re cautiously optimistic about the situation. In a statement this morning, the British Bankers’ Association said the plans would ‘reinforce confidence in the financial system by letting regulators make judgments that balance systemic stability with the need to support growth.’
Banks have previously been subject to stress test by the (now-scrapped) Financial Services Authority, but those were on an ad-hoc, rather than an annual, basis. Barclays, in particular, is still reeling after the Prudential Regulation Authority told it to bring its leverage ratio up to 3%, causing it to launch a £5.8bn rights issue.
If everything goes smoothly, this could provide a much-needed injection of good PR for an industry still dealing with the repercussions of various mishaps. Although, on the other hand, it could turn into a lot more bureaucratic box-ticking that won't necessarily prevent another crisis...
