Bank of England seeks opt out from EU bank stress tests

LONDON Thu Dec 5, 2013 8:48am EST

LONDON Dec 5 (Reuters) - The Bank of England wants Britain's banks to be exempted from a European Union health check next year on the grounds that it will be conducting its own rigorous exam.

The so-called stress tests are carried out by the EU's banking watchdog the European Banking Authority (EBA) every year, as an ongoing measure to restore market confidence in EU banks after the 2007-09 financial crisis and subsequent euro zone debt crisis.

But the test results have come in for criticism because countries apply the rules differently. In 2014 the European Central Bank will take over supervision of euro zone lenders and plans to run its own rigorous tests to uncover any possible shortfalls and avoid surprises once it takes charge.

Britain only agreed to the scheme after reassurances from EU government ministers that ECB supervision would not interfere with London's control of its financial centre.

Britain has participated in every stress test so far as they are a requirement for EU states. It's unclear what action the EBA could take if Britain unilaterally withdrew as no country has done so before.

The BoE, which has imposed tough capital requirements and ad-hoc tests on lenders in Britain, said in October it would conduct a stress test annually, starting in 2014 with the top eight lenders.

Jo Paisley, director of risk analysis at the BoE, told a banking conference earlier this week there were discussions with the European Banking Authority (EBA), the EU's financial watchdog that coordinates the regional stress tests.

"It's early days, but there is dialogue," Paisley told the conference. The BoE confirmed on Thursday that talks were underway. The EBA had no comment.

Britain wants to avoid going through two complex and intensive tests at the same time, and is confident that its own test as more stringent than the wider European healthcheck.

The BoE plans to show the EBA that the UK test will meet the requirements of the EU test and demonstrate clearly the resilience of the UK banking sector.

The next EU stress test won't be conducted until late spring or early summer, after the ECB's asset quality review (AQR), which the EBA has urged all EU states to carry out.

The results of the AQR and stress test will be published together in late October.

Britain's tests earlier this year showed that Barclays and Co-operative Bank needed to raise capital and that they and Nationwide needed to show how they could improve their capital and leverage ratios.

Britain has said that the UK's top eight lenders must comply fully with the new global financial rules known as Basel III, which relate to minimum capital requirements, from January - five years earlier than the global deadline.

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