Stress testing in the UK banking system: 2018 results

In March 2018, the BoE launched its 2018 stress test of the UK banking system, which covered 7 major banks accounting for around 80% of Prudential Regulation Authority (PRA)-regulated banks’ lending to the UK real economy. The 2018 stress test includes the annual cyclical scenario (ACS) and is the first to be conducted under the new accounting standard IFRS 9. The ACS is more severe than the global financial crisis (UK GDP falls by 4.7%, UK residential property prices fall by 33%, UK bank rate rises and peaks at 4%, etc.).

In this context, the BoE published in November the 2018 stress test results of the UK banking system. These results include aggregated data and also the individual results of the 7 banks participating in the exercise.

Overall, the stress scenario is estimated to be resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis. Further, major UK banks have continued to strengthen their capital positions, registering an aggregate CET1 capital ratio nearly 3.5 times higher than before the global financial crisis. Despite facing loss rates consistent with the global financial crisis, the participating banks would have in aggregated at the low point of the stress: a CET1 capital ratio of 9.2% in 2019, and a Tier1 leverage ratio of 4.6% in 2018.

This Technical Note prepared by the R&D area of Management Solutions analyses the main results of the 2018 stress test.

Executive summary

In this stress test 7 banks participated. Performance was assessed according to the 2018 ACS scenario, addressing projections on the economic situation in UK.

Scope of application

• 7 banks accounting for around 80% of PRA-regulated banks’ lending to the UK real economy.
  • Barclays
  • HSBC
  • Lloyds Banking Group
  • Nationwide
  • Royal Bank of Scotland Group
  • Santander UK
  • Standard Chartered

Main content

• Capital: the stress scenario would reduce the aggregate CET1 capital ratio from 14.5% at the end of 2017 to a low point of 9.7% in 2018, after factoring in the management actions, including the conversion of AT1 instruments. At an individual level, the impact differs across banks.
• Leverage: in the stress scenario, the aggregate leverage ratio (LR) would be reduced to a low point of 4.6% in 2018. Thus, it would be above the hurdle rate. At individual level, the impact differs across banks.
• Contributions to the shortfall of CET1 and LR (e.g. impairments, IFRS 9, net interest income expenses and taxes, etc.).
• Conclusions: banks have continued to build their capital strength during 2018. At individual level, no bank was required to take action to improve its capital position as a result of the stress test.

Download the technical note by clicking here .