State-backed banks pass stress test

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Published: Sunday 26th October 2014 by The News Editor

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Britain’s state-backed banks have passed a test set by European regulators to see if they can withstand another major financial crisis.

There were 24 failures out of the 123 institutions involved in the European Banking Authority (EBA) stress test, mainly in Italy, Greece and Cyprus.

Royal Bank of Scotland and Lloyds Banking Group – who are part-taxpayer owned – were successful, along with HSBC and Barclays.

Based on their finances at the end of 2013, banks were required to meet a capital buffer threshold of at least 5.5% under the stress-test scenarios.

Lloyds, which is 25% owed by the Government, posted a figure of 6.2% while 80%-owned RBS reached 6.7%. The figures for Barclays and HSBC were 7.1% and 9.3% respectively.

The Bank of England is planning to announce the results of its own stress test of UK banks on December 16, when there will be a number of significant methodological differences.

The results of the ECB test are based on a static balance sheet whereas the Bank of England version allows the size and composition of banks’ balance sheets to vary throughout the scenario.

Treasury economic secretary Andrea Leadsom said: “A key part of our long-term economic plan is to strengthen UK banks so that they can support the economy, help businesses and serve customers.

“I’m pleased to see that the UK banks have passed the EBA stress tests. This shows our robust reforms to build a more resilient banking sector are working.”

The 24 failing banks had a combined capital shortfall of 24.6 billion euro (£19.4 billion) but action taken over the course of the year has reduced this figure to 9.5 billion euro (£7.5 billion) among 14 banks.

Lloyds, which is due to issue a trading update on Tuesday, came closest to the 5.5% threshold.

However, the test is based on a static balance sheet and Lloyds said it did not reflect the significant progress made this year.

The bank said: ” We welcome the EBA’s confirmation that Lloyds Banking group meets all the capital benchmarks set out for the purpose of the stress test, and that the group is not required to take any action as a result of the test.

“This strong position reflects the steps taken by the group’s management over the last three years to return its balance sheet to a robust position and we will continue to use this strong basis to help Britain prosper.”

It is expected that Lloyds will resume dividend payments to shareholders when it reports full-year results in February, although confirmation of this is likely to come after the Bank of England stress test on December 16.

A separate test by the European Central Bank today found that 25 out of 130 of the eurozone’s biggest banks needed stronger buffers.

However, 12 have already made up their shortfall, leaving 13 needing to increase their capital buffers against losses by 10 billion euro (£7.8 billion).

Published: Sunday 26th October 2014 by The News Editor

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