Lloyds Banking Group PLC (LSE:LLOY) and other leading UK banks saw share prices jump after they passed the Bank of England's annual stress tests.
The UK’s top eight banks would be “resilient” in an economic environment much worse than the one they face and are well positioned to support households and businesses through a period of rising interest rates, the BoE said.
It said major UK banks would be resilient to a “severe stress scenario” that incorporated persistently higher advanced-economy inflation, increasing global interest rates, deep and simultaneous recessions in the UK and global economies with materially higher unemployment, and sharp falls in asset prices.
The latest tests cover NatWest, HSBC, Barclays, Standard Chartered, Lloyds, Santander, Nationwide and Virgin Money.
Lloyds explained the scenario was designed to test the resilience of the UK banking system to deep, simultaneous recessions in the UK and global economies, with large falls in asset prices and higher global interest rates.
In the scenario, base rates rose to 6% in the first year before gradually reducing to 3.5% in subsequent years; inflation increased to 17% and took five years to recover to the BoE's 2% target; GDP fell by 5% in the first year, unemployment peaked at 8.5% in the second year, and UK house and commercial property prices fell 31% and 45% respectively over the first three years.
Despite the severity of the stress test scenario, Lloyds said it significantly exceeded the capital and leverage hurdle rates of 6.6% and 3.5% respectively.
Shares in Lloyds rose 1.3%, Barclays PLC (LSE:BARC) gained 1.4%, NatWest Group PLC (LSE:NWG) firmed 1.2% and Virgin Money UK PLC (LSE:VMUK) advanced 4.1%.