By Max Colchester And Jason Douglas
LONDON--The U.K.'s biggest banks will be subjected to a severe
global economic slowdown and face major difficulty trading assets
under the latest Bank of England stress test.
The hypothetical stress test sees the eurozone and Chinese
economy contract, commodity prices fall and banks wrestling with
the default of a handful of major trading partners, the Bank of
England said Monday.
Seven major British based banks must maintain a ratio of core
tier one equity to risk weighted assets of 4.5% to pass the test.
They must also keep a leverage ratio of above 3%. The results of
the stress test will be published in December. Banks that fall
short may have to raise equity or further shrink their balance
sheets.
"This year's test will have a different focus and is equally
important," said Mark Carney, Bank of England governor. He added
that the balance sheet check will help spot additional
vulnerabilities in the system.
Unlike last year's test, which focused on a U.K. property bust,
this five-year scenario is aimed at seeing how U.K. banks with big
global operations and investment banks handle a world wide economic
downturn and financial market crunch. This will put pressure on
banks with big international operations including Barclays PLC,
Standard Chartered PLC and HSBC Holdings PLC.
One key aspect of the test will be how banks cope with an
inability to sell assets in slow down. This reflects regulators'
concerns that a loss of trading liquidity in markets could pose a
real threat to financial stability. Banks will be asked to model
how they would deal with five major trading counterparties going
bust. All banks are expected to grow lending to the U.K. economy
despite the slow down.
The banks being tested are Royal Bank of Scotland Group PLC,
Barclays PLC, HSBC Holdings PLC, Lloyds Banking Group PLC,
Nationwide Building Society PLC, Santander UK and Standard
Chartered PLC. Unlike last year the Co-operative Bank won't feature
in the test, as it has shrunk its balance sheet and become less
critical to the U.K. financial system.
The stress test assumes a sharp slowdown in global economic
activity that begins this year and lasts until 2019. The global
economy ekes out growth of 0.9% in 2015 hit by combination
deflation pressures, a Chinese housing price collapse and a big
selloff in financial markets. The scenario doesn't assume that
Greece leaves the eurozone but does assume a sharp contraction in
the euro area economy.
Write to Max Colchester at max.colchester@wsj.com and Jason
Douglas at jason.douglas@wsj.com
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