Lloyds Banking Group PLC (LON:LLOY) and Barclays PLC (LON:BARC) were among the worst performers in a European Union stress test of banks.
All 48 lenders passed the European Banking Authority’s test that sought to identify any capital holes to make sure banks can handle another financial crisis, but Lloyds and Barclays were the unexpected laggards.
The EBA set a capital ratio threshold of 5.5% in measuring the banks’ ability to withstand the impact of potential shocks like Britain crashing out of the EU next March without a deal, political uncertainty or a sell-off in government banks and property.
If banks were unable to pass the toughest part of the test without staying above the capital threshold, they could have been forced to raise more capital, sell risky assets or cut dividends.
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While none of the banks dropped below 5.5%, Lloyds and Barclays were among the three lowest scorers.
The test found Barclays had a core capital ratio of 6.37% and Lloyds with a 6.8% in the hardest part of the test. The EBA said the banks were marked down due to their exposure to riskier credit.
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The Bank of England is due to publish the results of its own test on British banks on 5 December.
Shore Capital said it was "quite clear to us" from recent management commentary and actions regarding dividends and buybacks that UK's Prudential Regulation Authority (PRA) is "very comfortable with UK bank capital levels, which is what ultimately matters (especially true in a post-Brexit world)".
"Furthermore, we don’t expect this view to change with the results of the Bank of England’s own stress testing exercise for which results are due to be published on 5 December," it said.
ShoreCap also suggested that concerns about the impact of IFRS9 accounting standards, which results in an earlier recognition of provisions, were overdone since the UK regulator has said it does not want it to lead to an overall increase in capital in the system.
"This makes sense, as it is purely an accounting methodology change which does not impact on the economics or cash flow from lending," ShoreCap said.
"We, therefore, remain confident in UK banks’ capital strength and their ability to continue paying dividends and fulfilling promises to return additional capital to shareholders via buybacks of both equity and non-equity instruments."