Banks to hold £6bn for risks beyond Brexit
Caroline Binham, FT financial regulation correspondent, analyses the demand by the Bank of England that British banks put aside an extra £6bn in capital to guard against macroeconomic risks beyond those posed by Brexit.
Studio filmed by Rod Fitzgerald. Produced by Josh de la Mare.
The Bank of England has just published its assessment of the health of the UK banking industry with its stress test results. Well, here to discuss that with me is the FT's financial regulation correspondent Caroline Binham. Caroline, welcome.
So is it a clean bill of health for UK banks?
Not entirely. We've got two banks, Royal Bank of Scotland and Barclays, which technically would have failed the test had they not already taken action to bolster their balance sheets. But by and large, particularly when we compare with last year, where both RBS and Barclays did significantly worse, it's not as bad as last year. So perhaps less dramatic. And we've seen that a little bit with the shares not really doing very much this morning.
And the stress test scenarios were tougher than last year's. Is that right?
They were. And there was this added so-called exploratory scenario, which was a far longer look at what banks were doing. We didn't really get the bank by bank details on that. But it's more akin to what the bank used to do, the Bank of England used to deal with these old-fashioned fireside chats asking banks to have a good look about what they were going to be doing in the future.
So who came out? You said Barclays and RBS, technically, failed, but passed because they already had measures in place. Lloyds seems to have done worst in terms of the share price performance, despite having done very well in the test.
Yeah. That's right. I mean, I wouldn't say it did particularly well. But it certainly passed the test. It ended up, post the stress scenario, above where - the hurdle rate, as we call it. However, as you say, its shares are down a bit this morning. And I think that was broadly because it didn't have the headroom that was perhaps hoped for.
And that's because it's MBNA acquisition meant that it had to provision for quite higher credit card - credit card losses and. Consumer credit, as we know, is one of the big concerns of the Bank of England right now. So I think there's concern that it might not have room to quite pay dividends in the way that people are hoping.
Now, one of the other headline bits of information that came out was that an extra 6 billion of capital is going to have to be put up by the banks in terms of meeting a counter-cyclical buffer. Tell us all about this.
So the rather scary sounding counter-cyclical buffer is really akin to a rainy day fund. And banks are told to build it up during the good times so they can then draw down upon it in bad. So it's not actually for Brexit-related losses. It's for anything that the bank deems a bit of a risk, beyond Brexit. So again, consumer credit, global debt, things like that that the Bank of England has been worried about for a long time.
So what the bank is really saying today was, as far as it's concerned, the banks are in good shape to withstand the worst that Brexit can throw at them. And really, now, it's up to other people, i.e. lawmakers, to get the rest in place and ASAP.
But generally, the general public should be reassured by the results of today's tests?
And the banks are in reasonable shape.
Well, I think the BOE's saying, we've done our job. We can now tell you that we think the banks can continue to lend to you households and you the real economy, despite even if we have a hard Brexit. And now, really, it's up to the politicians to make sure laws are in place, that we don't have legal uncertainty weighing on insurance, contracts, derivatives, and that kind of thing.
Just one final point, because Mark Carney, the governor of the Bank of England went slightly off script, I think, at one point during the press conference today. When he was asked about the London Stock Exchange and what seems like a pretty feisty boardroom [? row ?] there between the chairman and the chief executive, what exactly did he say?
Well, he said that he was a little mystified as to this debate that was raging, because I think there have been calls from the activist investor in this particular story, TCI, which is agitating, actually, for the status quo rather than change, unusually--
He wants the chief executive to stay.
They want Xavier Rolet to stay. And they've asked for the Bank of England and the FCA to intervene. And yeah, Mr. Carney said he was mystified by this debate. He couldn't envisage a situation whereby a CEO might stay beyond an already agreed period in where there's already an agreed succession plan in place that the Bank of England has already signed off on. And he said, all good things must come to an end.
Pretty unusual intervention from the governor. But an interesting one nonetheless.
Thank you, Caroline.