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BoE unveiled stress test results; expects banks to hold CCB of 1%

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 1, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The Bank of England (BoE) today released the results of annual 'stress tests'. Five out of the seven banks tested were found to have no capital inadequacies. These five banks namely- HSBC, Barclays, Lloyds Banking Group, Santander and Nationwide are also not required to take any action. The BoE noted that the other two banks namely- Royal Bank of Scotland and Standard Chartered managed to pass the tests only because they had taken steps to improve their capital ratios mid-way in the process. Both these banks are not thus not required to submit new capital plan.

    The central bank highlighted credit conditions in Britain have recovered from the financial crisis and now banks have begun to lend more freely. The BoE said the banking system has gotten over the phase that had followed the global financial crisis and was marked by “heightened risk aversion and retrenchment from risk-taking”. The central bank has however warned that asset prices continue to remain vulnerable to a big rise in interest rates as well as emerging market risks.

    Counter-cyclical capital buffer

    Banks from now on will be expected to hold a so-called counter-cyclical capital buffer (CCB) of 1pc during normal times. The BoE is in the process of making required changes to the bank-specific requirements to impose this (CCB) in a step-by-step manner from March next year. Currently the CCB stands at zero. The BoE has however already required some banks to hold extra capital to cushion firm-specific risks. The BoE was expected to raise the CCB this month to 0.5 per cent.

    The BoE also requires the banking sector to hold high-grade tier one equity capital of 13.5 per cent of risk-weighted assets by 2019, up from the current 13 per cent.

    As the credit conditions slips back to being normal, the BoE wanted to provide clarity to banks on its long-run aims for the amount of capital they hold. Banks had earlier complained that the central bank had piled on extra capital requirements, making lending harder for them. The Bank of England today said that it require banks to hold as much as 10 billion pounds extra capital.
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