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Bank of England Adapts Bank Stress Test for Pandemic Era

The Bank of England’s health check on banks this year will seek to ensure that Britain’s big lenders, including HSBC, and Barclays, can continue supporting the economy during the pandemic and will also look at how banks can return to more normal dividend levels.

Last year, the British central bank cancelled its annual stress test of banks so they could focus on keeping credit flowing to an economy hit by its worst downturn in 300 years due to COVID-19 lockdowns.

The test usually focuses on banks’ ability to face big theoretical shocks, but the focus has changed given that the economy is facing real stresses from the pandemic, the BoE said.

“At this point stress tests are used to assess whether the buffers of capital that banks have built up are large enough to deal with how the prevailing stress could unfold,” the BoE said in a statement.

Banks that will be tested this year also include Lloyds, NatWest, Standard Chartered, and Nationwide Building Society. Virgin Money UK will take part for the first time.

The BoE said this year’s test of the leading banks will be conducted in a “staggered” way, with banks submitting their initial projections earlier in April on coping with a range of market shocks without going below bespoke minimum capital levels.

The stress test scenario includes a second dip in economic growth in 2021-2025 on top of the one seen last year, with UK residential property prices crashing by a third and unemployment surging to just under 12%.

The scenario also includes simultaneous economic slowdowns globally, with protectionist tendencies in world trade becoming entrenched, the BoE said.

The test will also check if a big change in consumer spending patterns seen during the pandemic, such as sharp falls in spending on travel, entertainment and hotels, poses a risk to banks if these trends persist long term.

The BoE will publish aggregate results in the summer, with the usual bank-by-bank outcomes made public in the fourth quarter.

After the economy went into its first lockdown in March last year, the BoE told banks to suspend dividend payments to preserve capital. In December, the central bank set out “guardrails” for relaxing its curbs on bank dividends.

“As noted in the December 2020 Financial Stability Report, the results of the 2021 test will also be used as an input into the Prudential Regulation Authority’s transition back to its standard approach to capital-setting and shareholder distributions through 2021.”

To help banks with the different timetable this year, the BoE said their “ring fenced” retail banking units would not form part of the test, but will be included in the 2022 test.

Reporting by Huw Jones, editing by Louise Heavens and Jane Merriman

Source: Reuters

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