Lenders are to undergo extreme stress testing by the Bank of England

Lenders are to undergo extreme stress testing by the Bank of England

16:45 PM, 29th April 2014, About 11 years ago 15

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The Bank of England (BoE) is preparing to test eight UK lenders to see if they can absorb sharp falls in the housing market and rises in interest rates.

The test is to see if the lenders can withstand a 35% fall in house prices and an interest rate rise to 5%. This is not a prediction of anything to come, but part of a future examination by the EU’s banking regulator to increase the resilience of the European financial system to extreme market forces. Other economic forces will include a fall in GDP by 3.5% and a rise in the unemployment rate to 12%.

During the last banking crises and recession house prices fell by approximately 20% in the UK, so this really will be a tough test to pass.

The Lenders to be tested by the Bank of England’s Prudential Regulation Authority are:

  • Barclays
  • HSBC
  • RBS
  • Lloyds
  • Co-operative
  • Nationwide
  • Santander (UK)
  • Standard Chartered

The Treasury confirmed “The government created the new regulatory system in order to build a resilient economy and avoid repeating the mistakes of the past. Building strong and resilient banks is a core part of our long-term economic plan.”

Mark Carney, the Governor of the BoE said “much has been achieved in recent years to put the UK banking system on a sounder footing, so that it can support the UK recovery. The challenge now is to secure a strong, sustainable and balanced economic expansion. The Bank’s annual stress test will help ensure our banks support that expansion by remaining resilient.”

Similar tests carried out in the USA by it’s Federal reserve found serious issues with The Bank of America, which was then forced to cancel a planned increase in dividend to shareholders.

It will be interesting to see how our financial institutions perform against this stress testing and how it might affect the cost and availability of lending if they are forced to carry enough capital to cover these hypothetical scenarios.bank_of_england


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Anon

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8:59 AM, 30th April 2014, About 11 years ago

Hallmarks of yet another self fulfilling prophecy?

If the banks fail to meet the criteria they will have to re-capitalise. This creates potential for lending to reduce, thus causing knock on effects of dampening asset values, particularly property. On the other hand, it may just inspire further 'funding for lending' type arrangements and provide justification for interest rates to remain low and margins/fees high. It could also cause negative reaction in the stock markets, driving further investment into property and other asset classes. Will peer to peer lending continue to flourish in a sustained low interest rate environment?

Neil Patterson

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9:10 AM, 30th April 2014, About 11 years ago

Reply to the comment left by "Anon " at "30/04/2014 - 08:59":

All good points Anon and a great example of how one factor in economics affects many.

It will be very interesting to see how this plays out, but my gut feeling is that this will not be bad for Landlords and possibly good by stopping people getting too excited about recovery and keeping our feet on the ground.

Mark Alexander - Founder of Property118

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9:12 AM, 30th April 2014, About 11 years ago

This is an opportune time for landlords to do their own stress testing. It's very easy with our landlords calculator - see >>> http://www.property118.com/calculating-rental-yields-and-returns/
.

Some One

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11:53 AM, 30th April 2014, About 11 years ago

If we want conspiracy theories another option could be this could be used as an excuse to force the Nationwide to take over the Co-op's banking arm.

Unless I'm missing something I'm surprised to see Standard Chartered on that list as I don't think UK mortgages make up all that much of their business.

Neil Patterson

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12:53 PM, 30th April 2014, About 11 years ago

Reply to the comment left by "Some One" at "30/04/2014 - 11:53":

Oh Good Conspiracy Theory. That could have legs 🙂

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