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|What we can gather from the Bank of England stress tests|
|Wednesday, 02 December 2015|
John Thanassoulis, Professor of Finance Economics at Warwick Business School, said: “What the latest stress tests show is that we are out of the financial crisis – as all of the banks have passed – although two came close to not passing the test: Standard Chartered and Royal Bank of Scotland. But they were let through because they have plans to raise some more capital this year.
“It was a test about tail risk, that is checking if the banks were robust to deal with, in particular, big problems in China and emerging markets. This is why Standard Chartered, which does a lot of its business in those markets, was called up.
“What’s interesting is even though we’re out of the financial crisis; we’re not that so far out that the Bank of England is going to rein in on the banks. It is still warning them they are likely to need what it calls a ‘countercyclical capital buffer’ and is looking closely at the buy- to-let mortgage market for example.
“Consequently the Financial Policy Committee, part of the BoE, is in a dilemma. If they do act to strengthen the system further, for example with the countercyclical capital buffer, then they will be in effect tightening monetary policy, which is not good for the UK with inflation so subdued.
“The banks have, by international standards and compared to the past, a lot more financial capital than they used to – up to around 13% risk weighted assets, which is in line and better than most international laws.
“The tests were brought in to try to give investors’ confidence in the height of the financial crisis – to show them that this was the lowest that it could go, a bottom underneath which banks would never fall below.
“Now, moving out of the financial crisis there is a risk banks may stop listening. But I believe it is a useful exercise, it keeps the banks on their toes and gives the Bank of England a focus for their investigations with different banks.”
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