Bank of England sets out UK bank stress test scenario and reveals plans to raise the countercyclical buffer rate for British banks in 2017

Lauren Fedor
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Sunrise Over Canary Wharf - The European Headquarters Of Numerous Major Banks
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British banks, building societies and investment firms will need to build up their cash piles under new rules revealed today by the Bank of England.

In a statement today, the Bank’s Financial Policy Committee (FPC) said that even though British banks have improved their “resilience” in spite of global and domestic headwinds, investors expect weaker profits in the coming years – which could damage the banks’ ability to withstand future economic shocks.

The Bank said it would therefore go ahead with plans to increase the so-called UK countercyclical buffer rate from zero per cent to 0.5 per cent of risk-weighted assets. The new capital requirements are set to go into effect one year from today, on 29 March 2017.

Despite the new requirements, however, the Bank said around three-quarters of all UK lenders “will not see their overall regulatory capital buffers increase” as a result of the change, because the Bank will simultaneously reduce existing so-called Pillar 2 supervisory capital buffers.

The countercyclical buffer is designed to go up and down depending on the FPC’s assessment of risks to the UK banking system.

In December, the FPC said it expected the countercyclical buffer rate would be around one per cent in normal times. Today, the FPC said it would be “acting gradually” in raising the rate to the one per cent target.

The Bank also published its plans for this year’s stress test of Britain’s biggest banks, intended to see how lenders would fare in a scenario where global growth falls 1.9 per cent, while UK GDP growth contracts 4.3 per cent. Under the scenario, UK unemployment would increase by 4.5 per cent and residential property prices would fall by 31 per cent. The test will also factor in market volatility, depreciating currencies in emerging markets and oil prices of $20 per barrel.

HSBC, Standard Chartered, Lloyds Banking Group, Royal Bank of Scotland (RBS), Barclays, Santander UK and the Nationwide building society will be subject to the stress test, and Bank said the results of the test will be published in the fourth quarter of this year.

The Bank’s Prudential Regulation Authority (PRA) also published a separate paper this morning setting out new rules to restrict underwriting of buy-to-let mortgages.

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