The Bank of England said the UK’s eight largest lenders all passed its latest stress test, which examined their resilience to a severe economic downturn.
The firms would have enough capital to continue lending through a shock to the economy including a housing market crash, surging unemployment and interest rates as high as 6%, according to the results published on Wednesday.
“The UK banking system has the capacity to support households and businesses through a period of higher interest rates, even if economic and financial conditions were to be substantially worse than expected,” the BOE said in a statement. “The scenario is considerably more severe than the current macroeconomic outlook.”
Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc, Nationwide Building Society, NatWest Group Plc, Banco Santander SA’s British arm, Standard Chartered Plc and Virgin Money UK Plc were tested this year. Together they account for around 75% of lending to the UK economy.
The banks have high-quality liquid assets with a market value of £1.4 trillion ($1.8 trillion), with around two thirds in cash or central bank reserves, the BOE said. This means they would have ample resources to continue lending in the event that liquidity in the markets came under stress.
The test began in September after a six-month delay following Russia’s invasion of Ukraine. It included the UK base rate rising rapidly to 6% in early 2023 before gradually falling back to below 3.5% — one element of the scenario that is now playing out. Money markets are pricing the BOE’s key rate rising to 6.5%, according to interest-rate swaps tied to policy-meeting dates. That would be the highest since 1998 and compares with wagers on a 5% peak a couple of months ago.
The BOE also examined how well banks would cope with UK GDP contracting by 5%, unemployment more than doubling to 8.5% and residential property prices falling by 31%.
All lenders passed the BOE’s previous stress test in December 2021, with the central bank concluding they could weather a double-dip recession and Covid-19 societal adjustments that last for years. In the wake of the financial crisis, the BOE introduced regular testing in 2014 to check the sector had enough capital to withstand economic difficulties.
--With assistance from Greg Ritchie.
