Imagine that things started to look very gloomy in Britain. The value of the pound falls, inflation rises, interest rates spike to 4 percent. The economy shrinks by 3.5 percent, unemployment reaches 12 percent, and housing prices fall 35 percent, with commercial real estate declining 30 percent. Stocks and bonds weaken and bank funding dries up.
That cheery outlook was presented on Tuesday by the Bank of England as parameters for the stress test it plans to give the country’s eight biggest lenders.
Banks including HSBC Holdings and Barclays will have to maintain a Tier 1 capital buffer of 4.5 percent of risk-weighted assets or they will be forced to raise more capital.
“Much has been achieved in recent years to put the U.K. banking system on a sounder footing so that it can support the U.K. economy,†Mark Carney, governor of the Bank of England, said in a statement. “The bank’s annual stress test will help ensure our banks support that expansion by remaining resilient.â€
The British stress tests will take place alongside those conducted by the European Union’s banking supervisor, with the results to be released in the fourth quarter of 2014, after the E.U. results, which are expected in October.
The European Banking Authority announced separate scenarios for its stress tests earlier today, imagining a two-year recession, unemployment across the 28-member bloc reaching 13 percent and house prices falling 20 percent. (The British seem to do better on imagining worst-case-scenarios.) Banks will need to maintain a buffer of Tier 1 capital of 5.5 percent of risk-weighted assets.
The E.U. stress test is meant to restore credibility to the testers after previous examinations determined banks had sufficient capital, only to see them have to raise more money soon afterwards.
In November, the European Central Bank will take over supervision of the big euro-zone banks from their national supervisors.
