Britain's biggest banks are bracing for announcements from the Bank of England Tuesday which may force them to cut dividends in order to satisfy regulators’ capital requirements.
Seven leading lenders – HSBC, Barclays, Lloyds Banking Group, Standard Chartered, Royal Bank of Scotland, Santander and Nationwide – were subject to the Bank of England’s latest round of stress tests, the results of which are being published Tuesday.
The tests assessed how the banks would withstand risks from emerging markets, including a sharp slowdown in China and other emerging markets alongside falling oil prices and a strengthening US dollar.
Although the banks are expected to pass this year’s test without having to raise extra capital, analysts say concerns about the difficulty of next year’s tests could already put pressure on lenders to bolster their reserves.
“While we expect the immediate consequences from the BOE’s 2015 stress tests to be limited, the prospect of higher future requirements poses a risk to capital distributions,” Berenberg analysts said, adding they that the Bank’s updated approach to stress testing, published last month, will “create sustained pressure on banks to build larger capital buffers”.
The results will be published Tuesday alongside the Bank of England’s Financial Stability Report, which many, including the Berenberg team, believe will include the Bank’s first use of a so-called countercyclical buffer, another form of capital requirement.
In September, Bank officials set the buffer at zero but said they would review it with the stress test results. Last week, Bank of England governor Mark Carney appeared to signal that he would raise the requirement, saying the countercyclical buffer could make banks more resilient while addressing concerns about how an extended period of low interest rates has fuelled activity in the housing market.