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

by Neil Patterson

16:45 PM, 29th April 2014
About 5 years ago

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

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

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



Comments

Adam Hosker

16:55 PM, 29th April 2014
About 5 years ago

Will be an interesting test; the conspiracy theory in me, thinks the BOE are doing this test to get a deeper feel of what will happen when it starts to increase interest rates.

Never-mind a drop in price.

Neil Patterson

17:05 PM, 29th April 2014
About 5 years ago

If the UK lenders pass the tests it will be great for confidence in the UK financial industry and could be a good thing.

So my conspiracy theory is it could be a put up job to attract investment 🙂

If they fail miserably not so good 🙁

Maria O'Neill

17:12 PM, 29th April 2014
About 5 years ago

Reply to the comment left by "Adam Hosker" at "29/04/2014 - 16:55":

I totally agree. Surely everyone can see that a quick rise in rates will be extremely detrimental to long term economic recovery. A lot of landlords will be unable to sustain their portfolios because in my experience rents (in my neck of the woods) are not rising as some of the press would have us believe. Also the knock-on affect to freeholders, and management companies will not be insignificant. A controlled rise over a long period is the only way forward.

Neil Patterson

17:18 PM, 29th April 2014
About 5 years ago

The Bank of England have said that any rate rises are not even likely until next year and then if necessary only very slow and gradual.

They are aware of how detrimental it could be to the economy.

I think this is more a stick to beat the banks with.

Industry Observer

17:53 PM, 29th April 2014
About 5 years ago

Don't worry so much about a rise in rates the prudent can survive that to 5%

What less can survive ius a 35% fall in house prices.

5% interest rates as a measure is very sensible - having said that most lenders are at least 4% above base rate and have been for ages.

Picking 35% as a fall in average house prices I think is a very interesting figure and the project should give everyone, investors and occupiers, food for thought - or indigestion.

Mark Alexander

18:07 PM, 29th April 2014
About 5 years ago

I also agree with Adam Hosker, this will be music to the ears of the conspiracy theorists. It will also certainly give the pundits over on the HousePriceCrash forum something to talk about for many months if not years to come. One day, some their predictions may even come true! lol
.

Maria O'Neill

18:17 PM, 29th April 2014
About 5 years ago

Reply to the comment left by "Industry Observer " at "29/04/2014 - 17:53":

There is a fine line between being prudent and bring squeezed by freeholders and management companies (if you like me have one to many apartments) who are year on year hiking their fees. More worrying is their refusal to negotiate. This coupled with the new council tax laws on empty properties and added safety rules make prudency hard to achieve.

Jeremy Smith

18:21 PM, 29th April 2014
About 5 years ago

Will this lead the lenders to stress test borrowers up to 10% (5% above base of 5%), with the rental income needing to be 125% of that...
I think many will not pass that test.

If that was the test, they would only lend a maximum of £100,000 on a property yielding £12,500 pa...not very practical .

Industry Observer

18:56 PM, 29th April 2014
About 5 years ago

Mark

What goes round comes around, there have unless I am mistaken, been three serious price corrections/falls/collapses call them what you may since 1980 have their not?

You watching the Beeb 2 estate agents programme - listen to what the London agents are saying about the madness in the market. It can never continue for ever - impossible.

sam

22:18 PM, 29th April 2014
About 5 years ago

If the banks pass the stress test, it will only go to show they are making too much money.

If they fail, guess who will be footing the bill ?

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