Despite facing loss rates consistent with the global financial crisis, the major UK banks’ aggregate CET1 capital ratio after the stress would still be twice its level before the crisis. All participating banks remain above their risk-weighted CET1 capital and Tier 1 leverage hurdle rates and would be able to continue to meet credit demand from the real economy, even in this very severe stress, stated BoE.
In light of these results, there are mixed reactions from the financial services community. In a statement, the Royal Bank of Scotland’s interim chief financial officer Katie Murray said, “I am pleased that we have achieved a clear pass in the Bank of England’s stress test. This result provides confidence that RBS could continue to support its customers and the UK economy, even in the very tough economic conditions modelled in the test. It is a sign of further progress in rebuilding capital in a year when we also resolved our last major legacy issues as well as announcing an annual profit and paying a dividend for the first time in ten years.”
Meanwhile, UK-based P2P lending platform ArchOver’s CEO Angus Dent Angus wonders if stress tests can be trusted to prepare the industry for potential financial meltdown, given the secrecy they’re shrouded in – and questions whether what worked in 2008 could save us a decade later. Mark Carney is confident that stress tests will save us from a potential financial crisis – but can we trust the Bank of England and their stress tests, or is it all part of Project Fear? Stress testing is the Bank’s way of avoiding taking chances and making mistakes, like in 2008 when the base rate was cut from 5% to 0.5%. Perhaps this is why the tests imply that in the event of another financial crisis, the bank would increase rates to 4%. Unfortunately, we have little else to rely upon. These stress tests are the only real exercise we have to prepare our economy for Brexit, an event for which there is no precedent or parallel. Sadly, it really does come down to either trusting the Bank of England, or the barmy assumptions being made by Jacob Rees-Mogg and the European Research Group.”
If the Bank of England has been too complacent or optimistic and the banks fail, none of the levers that worked before will work again, he added. During the 2008 economic crisis, BoE pumped billions into the economy, causing an unprecedented asset price acceleration, and slashed interest rates. “But doing the same now would lead to hyperinflation and a worldwide interest rate crisis, which we may not survive – unless the stress tests have planned for this too. How are we to know?”
Largely, the secrecy that shrouds UK stress testing doesn’t alleviate the anxiety around what could happen post-Brexit. Even if UK banks are robust enough, there are concerns about contagion – in a more interconnected world than 2008, Carney’s tests are hopefully modelling for the impact that a German, French or Italian bank failing would have on the rest of Europe.
With BoE giving UK’s banks a clear bill of resilience, the next hurdle to cross would be Brexit, set to happen in March 2019. In the wake of a potential Brexit ‘identity crisis’, banks need to invest in the right technology to ensure they’re protecting customers from identity fraud – and complying with changing AML and KYC regulations.
Rene Hendrikse, EMEA MD, Mitek adds, “A buzzword for so long, digital transformation is, simply put, absolutely imperative to the future health of our banking system. Stress testing is a reminder that no bank is inherently ready to take on what the world might throw – but having the right technology in place gives banks a real advantage. Being a digital bank isn’t just about pleasing consumers. Digital transformation is now about ensuring compliance with increasingly stringent regulations – particularly as Brexit throws up endless questions about the future of financial regulation in Europe.
“Banks must comply with regulations to ensure they aren’t opening up themselves and their customers to fraud. Anti-money laundering (AML) and know your customer (KYC) regulations, for example, require banks to verify the identities of their customers. This demands the best technology to ensure that customers’ identity documents verify who they say they are. Without this, the opportunities for fraudsters increase exponentially. The potential impact of a Brexit-related ‘identity crisis’, with consumers moving their money and their citizenship around Europe, would only make matters worse. Not having the right tech in place could put banks at further risk – and this risk would be passed directly onto consumers.