UK's Major Banks Exhibit Resilience in Bank of England's Rigorous Stress Test

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The Bank of England (BoE) confirmed on Wednesday that the UK's eight largest financial institutions possess adequate capital reserves to withstand economic downturns more extreme than the 2008 financial crisis. These affirmations come amid rising interest rates that put significant pressure on consumers and businesses alike.

The BoE's stress test included a rigorous assessment of the banks' capital buffers against theoretical economic shocks, including a global surge in interest rates. The conditions simulated were said to be graver than the global financial crisis of 2008, which necessitated taxpayer-funded bailouts for several British banks.

Covering 75% of the UK's lending sector, the eight banks demonstrated considerable resilience in the face of an "annual cyclical scenario (ACS) stress test" for 2022/23. The BoE remarked in a statement that these institutions are equipped to manage persistently higher advanced economy inflation, escalating global interest rates, severe concurrent recessions, drastic increases in unemployment in the UK and globally, and steep declines in asset prices.

The BoE emphasised the robustness of the major UK banks' capital and liquidity positions, alongside their increasing profitability, as factors supporting their capital positions and their ability to assist their customers.

The stress test did not apply a universal pass threshold; instead, each bank had to overcome a unique challenge. Barclays (LON:BARC), Lloyds (LON:LLOY), HSBC, NatWest, Santander (BME:SAN) UK, Standard Chartered (OTC:SCBFF), Nationwide Building Society, and Virgin Money (LON:VM) all proved capable, with no capital deficiencies detected, the BoE noted.

Furthermore, the Bank decided to keep the counter-cyclical capital buffer (CCyB) for banks unaltered, a move aimed at ensuring banks have ample capacity to absorb future shocks without excessively curtailing lending.

Despite soaring interest rates, the UK economy is demonstrating resilience, according to the Bank's analysis.

Following the successful stress test, Virgin Money disclosed its plans to reinstate its share buyback programme this year, a move that boosted its shares by 3% in early trading. Barclays and Lloyds also experienced gains of approximately 1.5% at 0708 GMT, with NatWest, HSBC, and Standard Chartered recording smaller increments.

Major banks such as NatWest, Lloyds, Nationwide, HSBC, and Standard Chartered celebrated their successful outcomes, with NatWest, the UK's largest lender to small businesses, highlighting its "all-weather" balance sheet.

In addition to stress tests, the BoE is collaborating with the finance ministry to explore strategies for the orderly wind-down of smaller banks, given recent developments in the US where the collapse of Silicon Valley Bank necessitated a takeover of its UK subsidiary.

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