This week, the Bank of England (BofE) unveiled its latest strategy to ensure UK banks are capable of weathering a sharp deterioration in global economic conditions. Under the plans, Britain’s seven largest lenders will
undergo stress testing to assess their resilience to a ‘stress scenario’ designed with global and domestic risks in mind.
The inaugural test was introduced last year, following recommendations for regular stress testing by the Financial Policy Committee. But, while the 2015 stress test promises to build on last year’s approach, some feel its methodology needs improvement.
Uncomfortably plausible The Guardian’s Nils Pratley believes the focus of the 2015 test is justified. While you might expect the BofE to base its scenario on a collapse in UK prices or a break-up of the eurozone, Pratley feels the bank’s decision to set its sights on the global economy and “a deflationary spiral aided by a slowdown in China” is the right one.
Unlucky seven?The seven lenders that will be tested:
1. Barclays
2. HSBC
3. Lloyds
4. Royal Bank of Scotland
5. Santander
6. Standard Chartered
7. NationwideThe stress tests have to be credible, and deflation and China are the biggest risks in the system, he explains. Although the BofE points out that its chosen scenario is entirely fictional and is not expected to materialise, “the fear that the next crisis will come from emerging markets is uncomfortably plausible,” Pratley adds.
The Guardian opinion
Missing the point
Taking a more critical view, This Is Money.co.uk’s Mark Shapland points to lapses in the Bank’s proposed stress scenario.
He notes that many criticised the 2014 stress test for concentrating on domestic issues, while ignoring the fact that HSBC and Standard Chartered have significant investments overseas.
While Shapland claims that putting UK lenders through a “global doomsday scenario” is a step in the right direction, he suggests other fictional situations might have been more relevant, considering the current state of the eurozone.
“While the test models a sharp contraction of the eurozone economy, it does not examine the consequences of a break-up of the single currency union caused by Greece's exit,” he says.
This Is Money.co.uk story
Unfairly targeted
An even more vociferous critic of the 2015 stress test is James Quinn, Group Business Editor of Telegraph Media Group, but his opposition is for entirely different reasons.
In an article about the growing fear among senior bankers that the UK is becoming increasingly hostile towards financial institutions, Quinn argues that it’s time to “move on” from a deeply held resentment towards banks.
He feels that the latest stress test wrongly reinforces the targeting of banks and will unfairly place HSBC and Standard Chartered under the greatest scrutiny, due to its focus on China and a global downturn. “Both banks will – even if they don’t say so publicly – feel perhaps unfairly targeted compared with their mostly domestic brethren,” he writes.
The Telegraph piece
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