Moody's: Bank of England stress test highlights overall resilience despite weaknesses to global exposures and conduct risk

The results of the Bank of England's (BOE) annual stress test of the UK's seven largest banks and building societies -- published Wednesday 30 November -- show that while the domestically focused UK banking sector has improved in its resilience to a UK stress scenario, stresses to global exposures and trading, conduct and litigation risk are weaknesses, particularly for The Royal Bank of Scotland Group, Barclays and Standard Chartered.

Overall, the results provide reassurance as to the continued resilience of the UK banking sector and are broadly in line with Moody's own capital assessments of the tested banks. The 2016 stress test was more severe and comprehensive than both the 2014 and 2015 stress tests and introduced firm-specific hurdles. The tested firms were: Lloyds Banking Group, Nationwide Building Society, Santander UK, Barclays,HSBC, RBS and Standard Chartered, Moody's Investors Service says in a new report.

Moody's report, entitled "Banking -- UK: UK Stress Test Highlights Weaknesses at RBS, Barclays, and Standard Chartered," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. Please note that this report does not constitute a rating action.

"Banks with investment banking operations and global presence in the United States and Asia, namely RBS, Barclays, and Standard Chartered, faced the brunt of this year's stress, with no 'safe harbour' activities to help mitigate the impact of the stress," says Michael Eberhardt, a Vice President - Senior Credit Officer at Moody's.

"As we have seen since the crisis, global firms have typically been able to offset weaknesses in one market through better performance elsewhere. In the 2016 BoE stress, this is not the case and the results highlight this -- the profit generating capacity of lesser correlated market exposures and business lines was unable to materially dampen the effects of the stress outcome, particularly when tail risk from litigation exposures was taken into account," explained Mr. Eberhardt.

The UK-focused firms Lloyds Banking Group, Nationwide Building Society and Santander UK, on the other hand, performed the best among the seven tested firms. This is due to their improved capital levels and the de-risking they have undergone since the 2014 domestically-focused stress test. In addition, these firms were faced with less of an impact from global exposures and traded risks.

Overall, the stress test shows that the system as a whole demonstrates improved resilience to an adverse scenario -- this is largely attributable to an improved common equity tier 1 (CET1) starting point and mitigating actions taken by management to offset the stress losses.

Despite three banks [RBS, Barclays, Standard Chartered] being required to take remedial steps, the Bank of England's Financial Policy Committee(FPC) judged that on a system-wide basis, there was adequate capitalisation to withstand a stress of this severity.