Big banks can withstand a shock of the magnitude that the Omicron variant could unleash on the UK and still keep lending, the Bank of England says.
The Bank did not know about the new Covid strain when it set this year’s stress tests, but the severe measures included could be comparable to the damage Omicron might leave if it leads to further national lockdowns and other major dislocation, officials said.
Andrew Bailey, governor of the Bank, said the latest stress test on banks added a theoretical £70 billion of impairments over two years from scenarios including a 12 per cent peak in unemployment and a 37 per cent contraction in GDP between 2020 and 2022.
“You could read that across to the impact of Omicron,” Bailey said. However, he added that the development of Omicron was as yet unknown.
Sir Jon Cunliffe, the Bank’s deputy governor for financial stability, said that the test represented a “really severe” challenge and that the “system came through”.
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As a result of the robust results, banks are in a position to rebuild their “rainy day” capital buffers, the central bank said.
The so-called countercyclical capital buffer will rise to 1 per cent by next December and could increase to 2 per cent the year after.
Raising the buffer to 1 per cent will accumulate £11 billion of capital, while going to 2 per cent would create a pot of £22 billion. The move should not be too onerous, the Bank believes, as lenders have increased their capital pools during the pandemic and so can reclassify some of those funds as the buffer.
The countercyclical buffer was slashed to 0 per cent as part of a number of measures to respond to the Covid crisis by freeing up capital so that banks could continue to lend to customers.
“UK banks have weathered the pandemic well. Now is the time to start rebuilding resilience,” Bailey said.
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The Bank’s latest scenario for assessing the strength of the banking sector would see the equity capital ratios of the eight biggest institutions fall by 5.5 percentage points to a low of 10.5 per cent. All would remain above their necessary minimums and no firms will have to boost their capital as a result of the exercise, the Bank said last night.
However, some stayed above their floors with plans that involved withholding dividend payments, a measure which they may have to take if Omicron’s impact turns out to be very severe. Banks were ordered by regulators to withhold dividends early on in the pandemic as a precautionary measure but were allowed to restart them earlier this year.
Sam Woods, chief executive of the Prudential Regulation Authority, said the world was very different now as authorities and financial institutions know far more about coronavirus than they did in early 2020. “At the moment it is business as usual on dividends,” Woods said.
The stress tests were carried out on NatWest, Barclays, HSBC, Lloyds Banking Group, Standard Chartered, the UK arm of Santander, Nationwide building society and, for the first time, Virgin Money UK.
Lloyds came closest to breaching its regulatory minimum in the test, reaching 7.8 per cent under stress compared to the 7.7 per cent so-called reference rate set for the bank.
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The Bank cancelled last year’s test so that lenders could concentrate on their response to the Covid crisis. The annual assessments were introduced after the 2008 financial crisis as part of measures to boost banks’ resilience and to try to avoid future taxpayer bailouts.
The Bank also unveiled its latest Financial Stability Report yesterday which warned about debt levels built up by some companies as a result of the Covid pandemic, and the potential risk posed by the rapid growth of cryptocurrencies to the financial system.
The Bank said it intended to make changes to some of its rules about mortgage lending, which may enable more people to borrow but added that it would not implement an across-the-board relaxation of affordability criteria.
