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BoE: UK banks resilient to more severe financial crisis

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BoE: UK banks resilient to more severe financial crisis

The Bank of England's 2017 stress test revealed that none of the U.K.'s seven largest lenders need to strengthen their capital base, showing that the British banking system is resilient to periods of severe stress.

All of the participating banks and building society would be able to continue lending in an adverse scenario more severe than the 2008 global financial crisis. This includes simultaneous deep recessions in the U.K. and global economies, a 33% fall in house prices and misconduct charges of £40 billion in the first five years of the stress test scenario.

Banks included in the test are 3x better capitalized than they were 10 years ago, with an aggregate common equity Tier 1 ratio of 13.4% as of 2016-end, up from 12.6% a year ago. Even in a severe loss scenario, participating companies would still maintain an 8.3% CET1 ratio.

The test assumes losses of £50 billion in the first two years of the stress scenario, which would have wiped out participating banks' entire common equity capital base a decade ago, according to the Bank of England.

However, all companies bar Nationwide Building Society would be unable to pay out a dividend at the end of 2018 under the stress scenario.

The six other lenders participating in the test at Royal Bank of Scotland Group Plc, Barclays Plc, HSBC Holdings Plc, Santander UK Plc, Lloyds Banking Group Plc and Standard Chartered Plc. Last year, RBS failed the stress test, while Barclays and StanChart were warned that they needed to improve their capital positions.

In a stress scenario that includes the conversion of Additional Tier 1 bonds, RBS would have a 7% CET1 ratio, just above the 6.7% hurdle rate it would need to pass the test. Barclays would have a 7.4% CET1 ratio, clearing a 6.8% hurdle, while StanChart would have a 7.6% CET1 ratio, compared with a hurdle rate of 6.2%.

At the same time, the Bank of England's Financial Policy Committee has announced that it plans to increase the countercyclical buffer rate, which applies to all banks, to 1% from 0.5%.