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BOE reveals this year’s stress test for seven biggest banks

BOE reveals this year’s stress test for seven biggest banks

(29 May 2015 – Britain) Britain’s central bank plans to assess the resilience of the nation’s seven biggest banks against a 65 percent plunge in the Hang Seng Index, as well as a 34 percent collapse in Brent crude oil prices in this year’s stress test.

The Bank of England (BOE) will also examine banks such as HSBC Holdings Plc and Barclays Plc on their ability to weather trading book shocks, including a 23 percent decline in the euro compared to the US dollar over one year.

In its statement on 26 May, the BOE said to pass the test, lenders must maintain 4.5 percent common equity tier 1 and a 3 percent leverage ratio, both measures of financial strength.

The “innovations in the 2015 traded risk stress test are inspired by what has happened in real stress events including the GFC and by a desire to create a link to the forward-looking macro scenario, and are intended to impart a greater sense of realism to the stress test and its outcome,” the BOE said.

The stress test is the central bank’s second since taking over as the United Kingdom’s banking regulator in 2013, and reveals how its focus has shifted from domestic risks to concerns over liquidity in international markets.

The scenarios apply to a snapshot of lenders’ trading books as of 20 February.

Banks will be locked into losses on trades over periods of one day, one week, one month and one year.

 Lenders may have to raise additional capital after the tests even if they pass, the regulator said.

With potential market stresses related to events in Greece and elsewhere, BOE officials have been sounding the alarm about low liquidity in recent months.

BOE executive director Chris Salmon said that structural changes in financial markets leave them less able to absorb shocks, leading to the type of volatility seen in United States Treasury bonds in October and the Swiss franc in January.

Last year, the regulator modelled a rise in the BOE benchmark interest rate to 4 percent and house prices falling by more than a third, a financial catastrophe so severe that it has only happened once in the last 150 years.

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