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December 04, 2018

BoE 2018 stress test results and Financial Stability Review



The Bank of England’s (BoE) Prudential Regulatory Authority (PRA) published its annual stress test results and the Financial Policy Committee (FPC) published its Financial Stability Review.


Summary of published results


  • Stress test results: Annual cyclical scenario (ACS)
    • The aggregate transitional CET1 ratio of the seven largest UK banks were projected to decline from 14.5% at end-2017 to a low point of 9.7% in 2019 (7.0% before factoring in the impact of management actions and dividend payout restrictions). On the other hand, Tier 1 leverage ratio was projected to decline from 5.7% at end-FY17 to a low point of 4.6% (4.2% before management actions).
    • Barclays and Lloyds estimated to have their AT1 triggers breached. Both banks were projected to take the largest hit on IFRS 9 implementation under non-transitional measures. However, the PRA decided to exempt both from capital actions, acknowledging that the last reported capital metrics were adequate, and that non-transitional measures would only be a hypothetical low point until the full phase-in of IFRS 9 (expected in 2023). All other banks comfortably met their minimum thresholds.
    • IFRS 9 implementation advances provisioning charges, deepens low point: The cumulative five-year impairment charges are broadly similar to last year's tests, but IFRS 9 implementation leads to an advancement of impairments and hence results in a deeper hit to capital in 2019.
  • UK banks can withstand 'Disorderly Brexit Scenario (DBS)' despite severe macroeconomic shocks: Assumptions under DBS are less stringent than ACS, and would lead to an aggregate CET1 ratio depletion of just 200 bps (150 bps on macroeconomic shocks + 50 bps on market shocks). The key difference with ACS is it also incorporates a severe global recession, which exacerbates the impact on overseas exposures. UK banks benefit from half of their exposures being overseas, and a sizeable proportion of the capital buffers accrue to those exposures. We also note that the aggregate impact of their UK businesses in isolation would be 400 bps.
  • Biennial Exploratory Scenario (BES) postponed: Given the increased Brexit-related administrative burden on banks, the FPC and the PRC have delayed the launch of the next BES to September 2019.
  • Authorities considering qualitative reviews for subsequent tests: The PRA hinted at the possibility of including reference to qualitative review outcomes of individual banks in next year's stress test results. It also indicated observations from the qualitative review could be used as an input for assigning PRA buffers.