Most banks pass first stress test

published 18 December 2014

Britain's eight biggest banks have undergone the first of the Prudential Regulation Authority's annual stress tests. Their balance sheets (as of the end of 2013) were tested against a three-year disaster scenario that saw house prices slide 35%; the Bank of England's main interest rate shoot up to 4%, due to rising inflation; GDP slide by 3.5%; and sterling tank by 20%. The Co-op, as expected, failed the test, as its capital was wiped out by the hypothetical crash.

What the commentators said

"We're not out of the woods yet," agreed James Moore in The Independent. The stress test was hardly extreme it was no 2008 crisis yet two banks still failed.

Sure, it was well known that the Co-op would fail it has a big black hole in its accounts and needs to raise capital. But RBS only passed because it beefed up its capital-raising plans while the stress tests were still ongoing.

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However, at least it did something; the Co-op just said it would fail, then focused on "re-jigging its long-term incentive plan so its top people could still get paid".

Investors should also note that since both RBS and Lloyds only just passed, it could take them some time before they start paying dividends again.

The upshot, reckoned Mike Trippitt of Numis, is that another financial crisis would still leave the taxpayer on the hook. Crises rarely strike in the same place twice, however. Since these tests were devised, noted the FT's Jonathan Guthrie, oil has tanked, and everyone is thinking about the potential collateral damage.

Banks could face losses on the junk bonds issued by shale producers, for instance. So bear in mind that the stress tests encompassed "an economic backdrop that no longer exists".

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.