Britain’s banks will not have to undertake stress tests this year because of the coronavirus pandemic, the Bank of England said on Friday.
The central bank, which earlier in the week cut interest rates to an all-time low of 0.1%, announced several other measures it said were “aimed at alleviating operational burdens” on regulated firms due to the economic fallout from the virus.
Cancelling the annual stress tests for the eight major UK banks was “to help lenders focus on meeting the needs of UK households and businesses via the continuing provision of credit”, the BoE said.
Last year’s stress tests of seven banks indicated the banking system was in a position to withstand an economic shock more severe than the global financial crisis, and would be able to meet credit demand from UK business and consumers despite an economic crash.
While the BoE last week reduced the UK countercyclical buffer, the amount of cash needed for banks to withstand financial shocks, was cut to 0%, after being hiked to 2% from 1%.
This means banks can temporarily draw all of their capital and liquidity buffers as necessary to support the economy.
Shares in the banks shot up early on Friday, with up 5%, Lloyds Banking Group PLC (LON:LLOY), Barclays PLC (LON:BARC), HSBC PLC (LON:HSBA), Standard Chartered PLC (LON:STAN) and Royal Bank of Scotland PLC (LON:RBS) all up between 3% and 5% in early trading before they all quickly flattened off.
Challenger banks were the big movers, having fallen further, with Virgin Money UK PLC (LON:VMUK) up 25% to 72.8p and OneSavings Bank PLC (LON:OSB) up 12% to 224.6p.
The BoEs Prudential Regulation Authority (PRA) arm will monitor whether banks are making appropriate provisions for current and new accounting standards.
While forecasting is nigh-on impossible, the PRA expects the banks' treatment of their customers “to reflect the temporary nature of the shock, and fully take into account the significant economic support measures already announced by global fiscal and monetary authorities”.
Also, government policy on the extension of mortgage repayment holidays “shoud not automatically, other things being equal, be a sufficient condition to move participating borrowers into Stage 2 ECL”, the point where impairment provisions need to be materially increased.
Analysts at broker Shore Capital said: “The way we read this is that the BOE is working with government to ensure that capital drawdown is not excessively distorted by IFRS9 accounting and hence and hence banks should have the capital available to them in order to continue supplying credit into the economy.
“This feels to us like a forbearance chain, all the way from the [government]/BoE, through the banking system and to the end borrower.”