London - Banks in Britain may have to hold more capital than their international rivals under proposals for an annual stress test of lenders put forward by the Bank of England on Tuesday.
The BoE, spelling out how it will check that banks do not pose risks to the UK economy by being short of backing, said it would hold annual tests for major lenders like Barclays, RBS and HSBC starting in 2014.
Later tests would be broadened out to include big UK subsidiaries of major international banks, the BoE said.
Medium-sized British banks may also come under the scrutiny of BoE regulators and clearing houses could face their own health checks, the central bank said.
“Stress-testing can provide a quantum leap in transparency and accountability,” BoE Deputy Governor Paul Tucker said.
Mike Trippitt, director of banks' research at Numis Securities in London, said banks were already starting to see strong enough profits to build up capital buffers that would meet even a pessimistic stress test scenario.
At any rate, shares in Britain's biggest banks were unperturbed by the BoE's announcement, with most outperforming a rise for the broader market on Tuesday.
“The capital position of banks is pretty strong and without looking at the detail of the stress tests, what the market is saying is that these banks should be able to fare well,” Trippitt said.
Britain, which had to rescue several banks in the financial crisis, has already required its lenders to do more to bolster their capital reserves than required under global rules and that approach looks set to continue under the new framework.
“At the very least, banks would need to maintain sufficient capital to be able to absorb losses in the stress scenario and not fall below internationally agreed minimum standards,” the Bank of England said.
“But the level of capital that banks would need to maintain in the stress scenario could be set above strict internationally agreed minima and vary across banks.”
Since the near meltdown of global markets in 2008, Britain's banks have undergone several, ad hoc stress tests to check if individual lenders hold enough capital to withstand future shocks without more help from taxpayers.
The new system proposed by the BoE in a discussion paper released on Tuesday would take a broader approach to also check the health of the financial system as a whole.
Apart from topping up capital levels, remedies could include raising margin requirements on derivatives contracts, curbing dividends and bonuses, forcing banks to shrink risky business lines and changing management.
Unlike past tests, the BoE said it intended to publish the results of its future checks.
The bank said that in previous tests there was “insufficient engagement” by management, poor test design, discrepancies in data and too little challenge of underlying assumptions.
The results of the first tests under the new framework will cover eight major UK banks and will be published at the end of 2014.
Under the plan, the Bank plans to use a twin approach to testing, with all banks facing a common set of stressed market scenarios and individual ones to look into their specific vulnerabilities.
The bank said the two-track system would make it harder for lenders to downplay the amount of capital they might need, a sign of how regulators want to move away from relying on in-house models used by banks to determine capital requirements.
Britain's biggest banks also face the next stress tests by European Union regulators next year. - Reuters