Earlier this morning the Bank of England released the results of its latest set of stress tests for the 7 big UK financial institutions.
Having been up much of the night for a BBC Live 5 interview at 5:30, I've only had time to do a quick take and will leave a proper analysis for another time. But in the meantime, consider this from the Exec Summary:
"The economic scenario in the test is more severe than the global financial
crisis. Significant improvements in asset quality since the crisis mean that
the loss rate on banks’ loans in the stress test is the same as in the financial
crisis. In the test, banks incur losses of around £50 billion in the first two
years of the stress. This scale of loss, relative to their assets, would have
wiped out the common equity capital base of the UK banking system ten
The stress is more severe than the GFC? Losses from the GFC were half a trillion, maybe
more. So a stress more severe than the GFC produces a tenth of the losses of the GFC?
"The stress test shows these losses can now be absorbed within the buffers of
capital banks have on top of their minimum requirements.
"Capital positions have strengthened considerably in the past decade. Banks
started the test with … a Tier 1 riskweighted capital ratio of 16.4%. The
aggregate common equity Tier 1 (CET1) ratio was 13.4% — three times
stronger than a decade ago."
Capital ratios based on the RWA denominator are meaningless.
"Even after the severe losses in the test scenario, the participating banks
would, in aggregate, have a Tier 1 leverage ratio of 4.3% …"
Many experts suggest that we should have minimum of at least 15% and Lord King in his memoirs suggests that a core capital to assets ratio of 10% would be a good start.
An increase in book value capital is one thing, but a decrease in market-value capital is another. In market value terms, banks have less capital than before the GFC.
Let’s take the BoE results at face value. Their best stress tests say now that all UK banks would pass their standard.
For them Barclays has a stressed leverage ratio of 3.6%. Pass standard also 3.6%. By my best estimate, Barclays’ market value leverage ratio is well under 2%.
RBS, perennial problem child, has a stressed leverage ratio of 4.0%. Big change from last year’s 2.9%. But it hasn't returned a dividend in ten years. By my estimate, its leverage is well under 3% and could well be much lower.
Santander UK: their stressed leverage ratio 3.3%, while the pass standard is 3.25%.
Last but not least, we should remember Lloyds and Nationwide: each with huge real estate portfolios–let’s hope house prices don’t fall!
Misconduct costs are given as 0.6 percentage points. That is a lot. Remind me, how many of those responsible for the great financial crisis of the last decade are in jail?