Co-op Bank Fails Stress Test

Co-op Bank Fails Stress Test.

As driven by the EU Directive on financial strength of banks and stress testing under difficult economic conditions, 7 of the UK’s leading banks have passed:

• Barclays
• HSBC
• Lloyds Banking Group (which includes Halifax Bank of Scotland) but not now TSB
• Nationwide Building Society
• Royal Bank of Scotland (which includes Natwest)
• Santander UK
• Standard Chartered

Unfortunately, but perhaps as expected, Co-op Bank failed the stress test.
What is the Bank of England Stress test?

It is designed the test the financial strength of a bank and its ability to ride out the “perfect storm” economy.

The perfect economic storm looks are areas such as:

• Unemployment doubling where it is today
• Inflation being 4 times what it is today (and that’s only just over 6%) – who remembers the 1970’s and 1980’s with inflation on double figures?
• A stock market crash (i.e. over 20% falls) – we have seen that 3-4 times in the last 15 years or so
• House prices falling by over a third
• Sterling (GBP crashing) – just like what is going on in Russia today

Comment
We do not believe the stress tests go far enough and whilst officially, the Bank of England could not set such huge stress tests that ultimately means more would fail and potentially set up another ‘run on the banks’. We do believe that they should be regulated by the Prudential Regulation Authority to ensure that banks work steadily towards a target of coping when all extreme economic conditions.