Following the publication of a biannual Financial Stability Report, the UK's central bank signalled an “inflection point” that marks the conclusion of the post-financial crisis era.
Bank of England governor Mark Carney said British lenders are now
significantly more resilient than before the global financial crisis
“Following the global financial crisis, there was a period of heightened risk aversion and retrenchment from risk-taking as financial institutions, businesses and households sought to repair their balance sheets,” the Bank wrote in the report, adding, “the system has now moved out of that period.”
CMC markets analyst Jasper Lawler said the “icing on the cake” was when Carney said that banks are “already most of the way there” in reaching capital reserve targets for 2019.
Simon Hills of the British Banking Association told City A.M.:
This demonstrates that banks are in a resilient position and that the long road to more capital is coming to an end.
The report was published alongside the results of this year’s bank stress tests, which assessed the strength of Britain’s seven biggest lenders in a hypothetical global economic downturn.
While none of the tested banks outright failed the tests, Royal Bank of Scotland (RBS) and Standard Chartered were both flagged for “capital inadequacies”, with the Bank saying that neither of the lenders would have had enough reserves to withstand the stress scenario in which Chinese growth slowed to 1.7 per cent, oil prices fell to a low of $38 per barrel, volatility in financial markets spiked and the dollar appreciated against a wide range of currencies.
But the Bank said that both lenders had already taken the necessary steps to boost their capital buffers in recent months, and were therefore not required to submit new plans to the regulator.
Simon Hunt, UK banking and capital markets leader at PwC, said that despite the relatively poor performance of RBS and Standard Chartered, the overall results “confirm again the progress made by UK banks in building their capital positions”.
Hunt echoed Carney, who said that capital requirements for Britain’s biggest banks have risen ten-fold since the financial crisis.
Investors welcomed Carney’s assurances that there is “no new wave of capital regulation coming”, with share prices of most of the stress tested banks rising.
Meanwhile, the Bank sought to downplay concerns over its announcement that it is “actively considering” raising the so-called countercyclical buffer, an additional amount that banks will be forced to hold based on their domestic exposures.
The new capital requirement, which the Bank said it would raise or lower depending on perceived risks, currently sits at zero per cent of risk-weighted assets.
The Bank said yesterday, however, that it expects the buffer to be set at about one per cent when risks are relatively low – and that it would “carefully review” the setting of the requirement in March of next year.
It is understood that setting the countercyclical buffer at one per cent would amount to 0.4 per cent of banks’ capital levels overall, or about £10bn across the entire British banking system.
But the Bank said yesterday that an increase in the buffer would “probably not change the overall capital requirements for individual banks” as different capital demands were likely to be recalibrated.