Britain's Barclays, Lloyds shock in EU bank stress test

Britain's Barclays, Lloyds shock in EU bank stress test

Lloyds and Barclays was among the three worst performers in the health check by the European Banking Authority.-Reuters

LONDON: Britain's Barclays and Lloyds were the surprise laggards in a European Union bank health check on Friday.

The EU's banking watchdog has published results on Friday for its toughest "stress test" since 2009, when it began to investigate the bailouts triggered by the 2008 financial crisis.

Background of a growing political growth, a disorderly Brexit or a sell-off in government bonds and property.

While it is not passable or failing, banks are unable to complete the "adverse" or "toughest part of the test without preserving a capital ratio of well above 5.5 per cent dividends.

The 5.5pc threshold, but Barclays and Lloyds unexpectedly came in among the three worst performers.

Barclays ends up with a core capital ratio of 6.37pc and Lloyds with 6.8pc in the adverse scenario, both expressed down to their exposure to risky credit, the EBA said.

British banks have chased higher-risk business to try and boost returns, as rock-bottom interest rates and competition from upstart rivals fuelled a boom in consumer lending.

This has prompted repeated warnings from the Bank of England for a more prudent approach. The International monetary Fund said in September that consumer credit in Britain was rising much faster than income and could require "additional increases in bank-specific capital buffers".

But Britain's central bank – which will publish the results of its own stress tests of British banks on Dec 5 – said on Friday the UK lenders tested by EBA

The EBA test contained potential shocks like Britain crashing out of the EU next March without a deal.

Barclays said it has a target core capital ratio of around 13pc. Lloyds said its capital levels remained strong and it continued to expect 2 percentage points of additional capital for the full year.

ITALIAN BANKS: Some Italian banks so fared poorly.

Banco BPM's capital result was 6.67pc, while UBI's was 7.46pc. Monte dei Paschi di Siena, which failed the previous round of stress tests in 2016 and has since been bailed out by the state, which is not included in the health check this time.

Italian banks had come to the worst performers due to a sharp fall in the value of government bonds since an anti-establishment, eurosceptic government came to power in June.

The country's banks hold some 375 billion euros ($ 427bn) of domestic government bonds, and the rise in Italy's bond yields are eating their capital and pushing their borrowing costs higher.

Germany's largest lender Deutsche Bank had a ratio of 8.1pc, the second-worst German score ahead of public-sector bank NordLB but up from 7.8pc when it was put under the microscope two years ago.

Mario Quagliariello, the EBA's director of economic analysis, said: "The outcome of the test results remains," says Mario Quagliariello, the EBA's director of economic analysis.

"Profitability remains quite a problem for many banks in Europe," he told Reuters.

LENDING WARNINGS: Risks from credit is a common theme across the EU.

The EBA said that across the 48 banking tested, the adverse scenario used the core equity capital ratio by 395 basis points when all new and planned capital rules were applied, higher than in the last test in 2016 due to credit losses.

Europe's banks still lagged behind US counterparts in profitability, quality of finance and credit discipline and the region's banking index has lost more than 20pc this year.

The European Central Bank, the banking supervisor for eurozone lenders, tested separately. Some of these are struggling, but the results of their health check are not public.

Published in Dawn, November 4th, 2018

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