The Bank of England has cancelled this year’s stress test of major banks in Britain, saying it could be hard to implement new global capital rules while lenders are focused on supporting customer lending amid the coronavirus pandemic.
The central bank’s decision to scrap the test of the UK’s eight top banks comes after the European banking regulator cancelled its planned health check of lenders earlier this month, which was due to include British banking giants including Barclays and HSBC.
“The recent 2019 stress test showed that the UK banking system was resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs,” said the BoE.
Last week, the BoE cut the UK’s countercyclical capital buffer rate to zero per cent of banks’ exposure to UK borrowers, in the hope this would release up to £190bn of bank lending to businesses.
The Bank’s Prudential Regulation Authority (PRA), which supervises banks, said today that new capital rules from the global Basel committee due to be phased in over the coming years may also have to be pushed back because of the economic shock surrounding coronavirus.
“The PRA acknowledges that the existing Basel timetable may prove to be challenging, and is coordinating internationally to ensure that implementation will happen alongside other major jurisdictions,” the BoE said.
Eurozone banks had already lobbied hard for implementation of the remaining package of Basel capital rules to be pushed back, and the European Union is yet to approve laws to introduce the measures.
New rules pushed back to ease pressure on banks
The BoE also announced that it has paused work on an assessment of banks’ liquidity that was due to be completed by the middle of the year, in a bid to ease pressure on lenders during the crisis.
Britain’s central bank has also placed a test of banks’ ability to withstand climate change, which had been scheduled for next year, under review.
Banks have also asked regulators for relief on a new accounting rule, IFRS 9, which requires them to make provisions for losses before they are actually incurred.
The UK is facing a sharp downturn triggered by the Covid-19 outbreak, which is expected to increase the number of loans turning sour. This raises the prospect of banks having to find more capital and incurring further hits to their already under-pressure profits during the crisis.
The BoE said today that it “continues to consider the potential interaction of Covid-19 with IFRS9”, adding that it expects to provide further guidance next week. The sudden onset of the outbreak makes it “very challenging” for firms to make accurate forecasts regarding loan losses, it said.
The Bank’s Financial Policy Committee, which can order regulators to make changes to financial rules, is due to make a statement on Tuesday after its latest quarterly meeting.