Two UK Banks Warned on Stress Test

Two UK Banks Warned on Capital Reserve Stress Test.

The Prudential Regulation Authority (PRA), the arm of the Bank of England that regulates the financial strength of the banking industry, has confirmed that all bank and building society lenders this year have passed the new European Union rules for stress testing.

The stress tests were introduced to try and insure that no banking group will over expose itself to lending or toxic debt in light of the credit crunch crisis and banking collapses seen 7/8 years ago.

That said, the PRA has issued a warning to both the Royal Bank of Scotland (RBS) and Standard Chartered Bank that the amount of capital reserves that they hold needs to be improved.

Comment

This does not mean that these banks are at risk today.

However, given that markets move in cycles, the Financial Policy Committee (FPC), part of the Bank of England, which is a board member of the PRA, is adapting a new program to doublecheck any banks financial strength position using a "counter cyclical" methodology to stress test banks following an assessment of not just the financial position today but also where the economy is in its financial cycle.

All banks have made great strides to improve their financial strength as well as capital reserves and the stress testing that is carried out today is far more robust than it ever has been. That said, the government have also committed to not letting a UK banking group "go under". Therefore, whilst we can offer no guarantees, we suggest you do not worry too much that to banking groups have received a warning. The Bank of England is being proactive rather than reactive which is a good thing.