'No new capital requirements' says Bank of England, as UK banks pass annual stress tests

Speaking as the UK's central bank published its biannual 'financial stability report', governor Mark Carney said that UK banks were "now significantly more resilient than before the global financial crisis". The Bank of England would not require any of the largest banks to increase their capital holdings as a result of this year's round of 'stress tests', which also "[testified] to the value of the reforms that have rebuilt capital and confidence in the UK banking system", he said.

In his opening remarks, Carney dismissed concerns among UK banks about "a seemingly endless wave of regulatory change and a racheting-up of capital".

"All should be clear: there is no new wave of capital regulation coming," he said. "There is no 'Basel IV'. Our objective has never been to raise capital without limit, or by stealth."

The Bank has published the results of the stress test. Seven UK lenders were stress tested by the Bank of England based on their balance sheets as at the end of 2014: Barclays, HSBC, Lloyds Banking Group, RBS, Santander UK and Standard Chartered, and Nationwide Building Society. This year's scenario was based on whether they could withstand global economic shocks including a collapse in China's economic growth and deflation in the eurozone, and included the economic impact of substantial fines for misconduct.

To pass the tests, lenders must demonstrate their ability to maintain a 4.5% core capital ratio, referring to the main measure of bank solvency on a risk-weighted basis, as well as a 3% leverage ratio, after being exposed to the stress scenario. They must also be able to continue lending to the real economy over the stress period. Although both RBS and Standard Chartered failed the balance sheet test on 2014's figures, they have since taken action to address their shortcomings, the Bank of England said.

The Financial Policy Committee (FPC), which is the part of the central bank responsible for so-called 'macro-prudential' economic policy, has set a 'Tier 1' highest quality equity requirement of 11% of risk weighted assets, according to the financial stability report. Of this, 9.5 percentage points must take the form of highest quality common equity capital and roughly half should be 'buffers' that the FPC can call on in times of stress.

The report also sets out the FPC's intention to introduce a counter-cyclical buffer, which it is expected to do in March. This capital buffer will be "explicitly time-varying", allowing the FPC to require banks to set by capital "as risks wax and wane, in order to ensure the banking system can withstand stress without restricting the supply of credit to the real economy", Carney said.

The counter-cyclical buffer is expected to be set at a level "in the region of 1% when risks are judged to be neither subdued nor elevated", Carney said. However, this is not expected to increase banks' overall capital requirements. Instead, it will be used to "allocate capital to various risks in a clear, consistent and coherent fashion" in a way which "separate[s] the capital required to insure against macro-prudential risks from that needed for idiosyncratic firm risks", he said.

Specific risks to financial stability highlighted by the FPC in its report included those posed by the rapid growth of the UK's buy to let mortgage market and the "serious and growing" threat of cyber attacks. The risk from cyber attack in particular had "grown over time, reflecting increased use of technology in financial services", it said. It noted that 46% of respondents to the Bank of England's latest 'systemic risk survey' had included cyber risk as one of their main concerns, up from 30% in the first half of the year.

The FPC would continue to monitor the risks to financial stability posed by cyber attacks, including through its joint UK-US cyber exercises and 'CBEST' vulnerability testing, it said. However, it has ruled out intervening in the buy to let mortgage market ahead of a review of lenders' underwriting standards by the Prudential Regulation Authority (PRA) and a planned Treasury consultation on giving it the same powers of direction in relation to buy to let mortgage lending as it already has in relation to owner-occupier mortgage lending, it said.

"In the interim, the FPC stands ready to take action if necessary to protect and enhance financial stability, using its powers of recommendation," it said in its report.