Most banks pass first stress test

Britain’s eight biggest banks have undergone the first of the annual stress tests, with two failing to make the grade.

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.

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".

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
Greensill, Cameron and the return of Tory sleaze
UK Economy

Greensill, Cameron and the return of Tory sleaze

The collapse of Greensill Capital threw a spotlight on political lobbying when it emerged that former PM David Cameron had been fighting its corner. J…
17 Apr 2021
The MoneyWeek Podcast: how to not lose money to inflation and financial repression
Investment strategy

The MoneyWeek Podcast: how to not lose money to inflation and financial repression

Merryn talks to Peter Spiller of the Capital Gearing Trust about how he navigated the last extraordinary year; what he's buying now; and how he plans …
16 Apr 2021

Most Popular

Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021