Banks set for first of new annual BoE health checks
By Matt Scuffham
LONDON (Reuters) - Britain's biggest lenders are waiting to find out if they have passed a new annual health check of their finances by the Bank of England (BoE), designed to avoid a repeat of the spate of bank bailouts which cost British taxpayers billions.
Britain pumped 66 billion pounds into Royal Bank of Scotland and Lloyds Banking Group to keep them afloat during the financial crisis of 2007 to 2009, prompting a shake-up in the way banks are supervised.
The BoE's new Financial Policy Committee (FPC), tasked to deal with potential risks to the economy from the banking system, recommended banks be tested regularly to check they have sufficient capital to withstand market shocks.
The results of the first test will be published on Tuesday at 7:00 a.m.. The BoE test adds a number of additional layers on top of those applied by European regulators in an EU-wide test of 123 banks in October.
The BoE's doomsday scenario features a slump in the value of sterling and a build-up of inflationary pressures, leading to a tightening of monetary policy and a rise in interest rates to 4 percent from 0.5 currently.
Such factors lead to the country's output falling by about 3.5 percent from its level at the end of 2013 and unemployment rising to 12 percent. House prices subsequently fall by 35 percent and commercial property by 30 percent.
Britain's eight biggest lenders - Lloyds, RBS, Barclays , HSBC , Santander UK , Nationwide , Co-operative Bank and Standard Chartered - must show they hold enough core capital to withstand the scenarios without needing extra funds.
The test requires them to have a core capital ratio of at least 4.5 percent of risk-weighted assets under the scenarios, lower than the 5.5 percent pass rate set in the European test.
The Co-operative Bank, which nearly collapsed last year and fell under the control of bondholders after a 1.5 billion pound capital shortfall was identified, has already warned it may fail the test.
Although the other banks are expected to pass, the most focus will be on state-backed Lloyds and RBS.
Lloyds, 25 percent owned by the government, risks rejection of its plans to pay a dividend for 2014 unless it performs strongly. RBS, 80 percent state-owned, will be under scrutiny having only narrowly passed the pan-European test.
(Editing by David Holmes)
