Higher capital demands for banks under new stress test says BoE

The Bank of England has released the record of a Financial Policy Committee Meeting which discloses plans for British banks to hold more capital than foreign competitors.

Annual stress tests are set to start next year, with Barclays, HSBC, Lloyds, Co-op, Standard Chartered and RBS all being tested.

The Bank stresses its "key overarching priority would remain to monitor, and if necessary act to mitigate, risks to financial stability from the macroeconomic and financial environment".

At the very least, banks would need to maintain sufficient capital to be able to absorb losses in the stress scenario and not fall below internationally agreed minimum standards.

But the level of capital that banks would need to maintain in the stress scenario could be set above strict internationally agreed minima and vary across banks.

Stress testing will take a few years to build up, with the test in place for next year a juvenile version.

Commenting on the paper, the governor of the Bank of England, Mark Carney, said:

The new stress tests will bring together expertise from across the Bank, including macroeconomists, financial stability experts and supervisors. This will materially strengthen the Bank’s analytical capability to assess risks to resilience. Our intention is that stress testing evolves into an essential component of our prudential framework, complementing our capital and liquidity standards.

The committee already supports the reduction of the EU's Basel Liquidity Coverage Ratio (the prescription of an amount of high-quality liquid assets banks should hold), with recommendations to introduce the measures to building societies, smaller banks and UK subsidiaries in major overseas banks. Higher capital requirements should, the committee says, be applied to high exposure or leverage, or uncertain valuation firms.