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UK banks take the strain

Tuesday, December 16, 2014 - 02:18

Lloyds and its British rival RBS scrape through a doomsday scenario of plummeting house prices and soaring unemployment in the Bank of England's first ever annual stress tests, but the Co-operative bank fails. Ciara Lee reports.

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It was the first test of its kind in the UK - eight of the country's biggest banks put through their paces in a stress test. The doomsday scenario was mapped out by the Bank of England and included look at what would happen if high unemployment, inflation and interest rates, as well as plummeting house prices, hit the UK economy. Five passed comfortably - Barclays, HSBC, and Nationwide, along with Santander UK and Standard Chartered. But RBS and Llloyds - both of which received state bailouts during the financial crisis - only just scraped through. Lloyds' narrow pass raises questions about whether it will be allowed to pay a dividend for 2014. The Co-operative Bank, which nearly collapsed last year before being bailed out by bondholders, was the only bank to fail the test. Its core capital fell to minus 0.2 percent under the stresses. Bob Parker is from Credit Suisse. (SOUNDBITE) (English) SENIOR ADVISOR AT CREDIT SUISSE, BOB PARKER, SAYING: "I do think they will have to shrink their balance sheet. They will have to reduce risk-weighted assets and I think they will have to increase capital further. The other UK banks passed the stress tests although one has to say that in the case of RBS and Lloyds, I do think a further strengthening of the balance sheet is required." The test in the UK is similar to that conducted by the European Banking Authority in October. Those checks found that 24 European banks needed to tighten up their finances to be more resilient. Britain decided to introduce annual tests in the wake of the financial crisis which saw taxpayers pump 66 billion pounds into troubled banks. But critics say the wrong things are being tested and that it should have included a collapse in the oil price and deflation in the euro zone. And the banking sector could face more questions over whether it's lending enough after the latest UK inflation data. Consumer prices rose by just one per cent year on year in November - the lowest rate in more than 12 years, easing pressure on the Bank of England to raise interest rates. The Bank expects inflation to fall below one percent over the next few months. It's given some respite to British households and average earnings rose by more than prices in September. That's welcome news for the government ahead of May's elections.

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UK banks take the strain

Tuesday, December 16, 2014 - 02:18