* UK test results due by end of year, after EU results
* UK pass mark based on full Basel III implementation
* Passing test won't necessarily mean no more capital needed
By Huw Jones
LONDON, April 29 Britain's lenders will have to
show they hold enough capital to withstand a near 35 percent
slump in house prices and a spike in interest rates to 4
percent, the Bank of England (BoE) said on Tuesday.
The BoE's Prudential Regulation Authority (PRA) said eight
of Britain's biggest banks and building societies will have to
undergo the so-called stress test, in some cases on top of
separate European Union tests also announced on Tuesday.
Factoring in a slump in housing prices coincides with
concerns among economists that there is already a bubble in
property prices in Britain's capital which is spreading to the
rest of the country, a view the BoE has played down.
The results of Britain's test will be published after the EU
test outcome has been made public in October, but before the end
of the year.
Banks will have to show, in what will be an annual test,
that they would still have a core capital ratio of equivalent to
at least 4.5 percent of their risk-weighted assets if hit by a
slump in house prices and higher interest rates.
"If a firm's capital ratio is projected to fall below the
4.5 percent core equity Tier 1 ratio in the stress, there is a
strong presumption that the Prudential Regulation Authority will
require the firm to take action to strengthen its capital
position," the BoE said in a statement.
A bank may even be required to take action to boost its
capital levels even if it ends the test at or above 4.5 percent.
The European Banking Authority, an EU watchdog, has set a
pass mark of 5.5 percent, but the BoE said the UK threshold is
based on full implementation of tougher global bank capital
rules known as Basel III. The EBA test pass mark is based on
partial application of the global rules.
"The criteria that they are testing look very sensible to me
... They do these stress tests to demonstrate some robustness in
their approach, but the PRA's got a lot of discretion to say you
do or don't need more capital," said analyst Gary Greenwood at
brokerage Shore Capital.
Shares in the banks being tested generally rose further
after the BoE published details of its stress test.
The test of theoretical shocks will cover a three-year
period when interest rates would jump to nearly 4 percent and
unemployment rises to 12 percent, the BoE said.
Sterling would lose nearly a third of its value in the first
year of the test.
The BoE wants to move beyond a simple pass or fail test and
instead obtain data to check on the quality and not just the
quantity of capital banks are holding in order to make a
judgement on how much is needed.
For Barclays, HSBC, Lloyds and
Royal Bank of Scotland, the exercise will come on top of
a common "stress test" 124 leading European Union banks will
undergo in coming months.
The remaining four UK banks being tested only by the BoE's
exercise are Co-operative Bank, Nationwide, Santander UK (part
of Spain-based Santander ) and Standard Chartered
(Additional reporting by Matt Scuffham Editing by David
Milliken and David Holmes)