The prudential regulation authority (PRA) tested seven banks and building society Nationwide to see how they would handle a financial meltdown of epic proportions. While Lloyds, Standard Chartered, HSBC, RBS, Santander, Barclays and Nationwide passed, the Co-op did not.
The minimum capital ratio needed to pass the stress test is 4.5 per cent; the Co-op was left with -2.6 per cent.
RBS hardly passed with flying colours: its capital reserves would be 4.6 per cent, a scrape above the level needed to pass. Lloyds fared slightly better, coming in with five per cent.
All three were referenced by the BoE, which said the banks needed to "strengthen their capital position further".
"But, given continuing improvements to banks’ resilience over the course of 2014 and concrete plans to build capital further going forward, only one of these banks (Co-operative Bank) was required to submit a revised capital plan," it added.
Co-op has been in real trouble of late, reporting a £1.3bn loss in 2013 and losses of £76m for the first half of 2014. It is not expected to make a profit until 2016.
However, in response to the stress test, the troubled bank said it was in a far stronger position than a year ago and that it had presented a revised capital plan that had been accepted by the PRA.
It would, it said, be adjusting its "turnaround plan" in the wake of the results:
The bank's overall strategy remains broadly the same. As previously stated, the bank's strategy was always designed to build resilience by disposing of or running down non-core assets. The PRA has required the bank to revise its plan to create a capital buffer to withstand the severe stress scenario by the end of 2018.
The tests are more extreme in nature than those carried out by the European Banking Authority (EBA) earlier this autumn. While the EBA tests required a Tier One Common Capital (CET1) ration of 5.5, higher than the BoE's 4.5, the scenario dreamt up by the PRA was far tougher and included all the fire and brimstone of an economic apocalypse.
Banks were to see what would happen if their balance sheets were to suffer scenarios including the wrath of a 35 per cent plummet down to 2002 house prices, soaring unemployment of 12 per cent, and inflation reaching escape velocity. The house price drop was only 20 per cent in the EBA scenario.
BoE governor, Mark Carney said the fact most banks passed the tests was proof of improved resilience of the sector. He said:
The stress test completes our capital framework by informing judgements about the appropriate size of capital buffers for individual firms and for the system as a whole. It is a major component of both our macro- and micro-prudential regimes. As a joint exercise between the PRA and FPC, it demonstrates the major synergies possible across the Bank of England. This was a demanding test.
The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited.
Here is a table of the results posted by the BoE: