The Bank of England put Britain's eight largest lenders through their paces exposing them to a "severe stress test" to see how they would stand up to a global financial crisis more extreme than the one that engulfed the world in 2008. File photo by Andy Rain/EPA-EFE
July 12 (UPI) -- Britain's largest lenders could withstand a worst-case scenario global financial crisis featuring persistently high inflation, soaring interest rates, deep economic recession, high unemployment and collapsing asset prices, according to the results of the Bank of England's latest stress tests out Wednesday.
The results of the 2022-2023 annual stress test show that all eight main banks were resilient to the "severe stress scenario," supporting the financial policy panel's judgment that the banking system has the capacity to support households and businesses through a period of higher interest rates, even if economic conditions are substantially worse than expected, BoE said in a news release.
Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander U.K., Standard Chartered and Virgin Money all passed the severe stress test which included house prices collapsing by a third, an inflation rate of 17% and unemployment more than doubling to 8.5%.
Banks went into the test with much-improved asset quality since the last cyclical stress test in 2019 due to increases in house prices, a tightening of lending standards and changes in the composition of banks' balance sheets, the central bank said.
This had the effect of dampening the negative impacts of the macroeconomic shocks used in the crisis scenario.
"Net interest income increases as policy rates rise in response to higher inflation. This benefit is constrained by banks being required to assume an increasing share of deposits are interest-bearing, and that the interest paid increases by more than recent experience," the bank said.
BoE stressed that the resilience demonstrated relied in part on banks' ability to cut dividend payments, employee remuneration, and coupon payments on Tier 1 instruments, as well as other management actions taken in response to the stress.
"The Financial Policy Committee judges it important for investors to be aware that banks would take such actions as necessary if such a stress were to materialize," BoE said.
The tests follow a tumultuous few months for the banking sector globally that saw a rescue takeover of Swiss banking giant Credit Suisse and the collapse of the United States' First Republic Bank, Signature Bank and Silicon Valley Bank which in turn forced the pre-emptive sale of SVB's $9.7 billion British subsidiary to HSBC for just $1.30.
