The Bank of England is set to scrutinise the ability of banks to withstand a global shock hailing from so-called “emerging markets” next year, as it announced that state backed Lloyds and Royal Bank of Scotland only just got through the latest round of stress tests.
The Bank’s Governor, Mark Carney, said: “You can expect [that] we will look towards some of those global risks much more closely – they will figure more prominently. Given the footprint of some of our largest banks in Asia and the risk profile in Asia, quite frankly, you can expect that would be a component of it.”
That could pose a question to the beleaguered emerging-markets bank Standard Chartered whose CEO, Peter Sands, is under pressure to boost performance after successive profit warnings.
On a day when the FTSE 100 finished ahead by nearly 150 points, a 2.6 per cent rise, Standard Chartered shares barely changed, finishing up just 0.5p at 893.5p.
HSBC, another bank with a big emerging-markets presence, finished up 11.3p at 603.5p. Barclays, which could also be challenged by such a scenario through its large and growing African businesses, ended at 230.17p, up 4.97p.
Those rises, of 1.9 per cent and 2.2 per cent, were much more in line with the performance of the wider market.
The Bank’s apparent focus on emerging markets – it is currently in the throes of designing the next set of tests – comes amid growing concerns about the sharp fall in the Russian rouble, although Mr Carney played down any potential threat to the UK from Russia’s escalating crisis.
Barclays, and especially HSBC and Standard Chartered, came through the most recent stress tests with room to spare. They required banks to focus on domestic concerns, by looking at the impact of a 35 per cent fall in house prices, a sudden rise in interest rates to 4.25 per cent, and a surge in inflation all combining in a nasty recession.
RBS only passed by updating its capital plan during the tests, and Co-op failed as expected. It would probably have run out of money in such a scenario but it was the only one of the eight banks involved to slip up. Now majority-owned by hedge funds, the Co-op Bank is working on plans to address the situation and is not expected to have to raise fresh funds.
Lloyds shares struggled to post a gain of 0.41p to 74.81p, or 0.55 per cent yesterday. RBS finished at 372.04p, up 8.34p. However, it announced the sale of a package of risky and loss-making property loans to Cerebrus Capital for £1.1bn with the money added to its capital pile.
Analysts were more concerned about the Lloyds figures, fearing it will have to delay plans to resume dividend payments, something not in prospect for RBS, at present. Lloyds will have to secure permission from the Bank to make such a move.
The broker Jeffries said: “We believe expectations that Lloyds will commence a dividend this year are misplaced,” describing the resumption of a payment as “a 2016 event”.
Mike Trippitt, of Numis, also warned that despite the tough criteria used by the BoE, a repeat of the 2007/8 crisis would still leave the taxpayer “on the hook”.
He told the BBC’s Today programme “there is not enough capital in the system to avoid that”.
That view was backed by Panmure’s chief city commentator David Buik. “Taxpayer on the hook? Definitely,” he said.
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