BOE to Toughen Stress Tests for Large U.K. Banks

LONDON—The Bank of England on Wednesday said it will toughen "stress tests" of the U.K.'s largest banks but gave a reprieve to major global banks such as J.P. Morgan Chase & Co. and Citigroup Inc. by delaying plans to include their U.K. arms in the annual health checks.

The BOE had previously said large U.K. units of foreign banks would have to undergo the tests, which assess whether banks have enough capital to withstand economic and market shocks. In its reversal on Wednesday, it said it will instead rely on cooperation with banks's home regulators such as the U.S. Federal Reserve to assess the U.K. divisions.

It left the door open to eventually including foreign investment banks in tests that would cover the whole of the U.K. financial system, including insurers and hedge funds, but didn't give a timeline for when that might happen.

For the eight British banks undergoing the tests—Barclays PLC, HSBC Holdings PLC, Standard Chartered PLC and Royal Bank of Scotland Group PLC,, Lloyds Banking Group PLC, Santander U.K., Co-operative Bank PLC and Nationwide Building Society—the minimum capital needed to pass will rise from next year. The levels will vary from bank to bank, reflecting individual capital requirements set by the Bank of England and additional buffers for the country's four systemically important global banks—Barclays, HSBC, RBS and Standard Chartered.

Public stress tests started last year in Britain. The results of this year's tests, using the old criteria, will be published on Dec. 1.

The British stress test regime will also start assessing banks every two years on "exploratory" scenarios that policy makers see as emerging risks for banks, the BOE said. These could include looking at how banks would cope with a structural decline in certain industries they lend to, such as energy, or their exposure to struggling countries.

The core of the tests—how banks would fare under a scenario of severe economic and market moves—will continue to be applied annually.

Stress tests have become a key tool for the BOE and other banking regulators to determine whether banks have enough capital to withstand shocks and prevent a repeat of the financial crisis of 2008. The British tests assess the capital strength of individual banks, as well as the overall stability of the country's financial system. Banks that don't pass the tests can be forced to raise additional capital or postpone paying shareholder dividends.

The move to delay testing foreign investment banks will be welcomed by the banks, which had been concerned about adding another layer of regulation to their operations.

The BOE said it "believes that a better picture of the risks faced by these inherently global banks can be obtained through cooperation and information sharing with their home regulators, including on group-level stress tests."

The Federal Reserve started stress testing some foreign bank units in 2014 and is expanding the process to cover additional lenders. The European Banking Authority began public stress tests of large European Union banks in 2009 but doesn't conduct the exercise every year.

Write to Margot Patrick at [e-mail]

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October 21, 2015 06:35 ET (10:35 GMT)

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