The UK banking system is “significantly more resilient” than a year ago, Bank of England governor Mark Carney said today after most major lenders passed a test to see how they would cope with severe economic stress.
The Co-operative Bank was the only institution to fail the exercise and has been told it must reduce its loan book by £5.5 billion by 2018.
The test results also raised concerns about state-backed Lloyds Banking Group and Royal Bank of Scotland (RBS), although improvements and changes to their plans this year mean they have been given the all clear.
The Bank found that a severe downturn with house prices plunging 35 per cent would wipe out the Co-op’s capital because of the effect on its risky commercial property and sub-prime home loans.
However, the Co-op said the result came as no surprise and that it was much stronger than in 2013 following the first year of a restructuring plan.
The test examined how lenders’ balance sheets would stand up to a potential Doomsday scenario of economic crisis by calculating the ratio of capital against loan assets on their balance sheets in such an event.
Firms were not allowed to respond to the stress test by cutting the supply of lending.
Mr Carney said: “This was a demanding test.
“The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that growing confidence in the system is merited.”
He added: “Most importantly, the results suggest that the banking system is strong enough to continue to serve households and businesses during a severe shock.”
The test judged that Lloyds, 25 per cent owned by the taxpayer, would fall to a capital ratio of five per cent under the test scenario, though by taking severe actions such as cost-cutting this would be 5.3 per cent.
It compares with a minimum benchmark set by the Bank of 4.5 per cent.
The group, which includes the Halifax and is heavily exposed to the UK housing market, “remains susceptible to a severe economic downturn”, the test found.
But it said that, in light of the measures it already had in train, it did not require Lloyds to submit a revised capital plan.