Banks braced for verdict on tougher stress tests tonight

For free real time breaking news alerts sent straight to your inbox sign up to our breaking news emails

Sign up to our free breaking news emails

Please enter a valid email address

Please enter a valid email address

SIGN UP

I would like to be emailed about offers, events and updates from The Independent. Read our privacy notice

Britain’s banks will tonight learn whether they have passed tough Bank of England stress tests, after the collapsed bank HBOS was told it had “less than” a 1 in 100,000 chance of failing those imposed by the then regulator just three years before its near-collapse.

The revelation of how weak the old stress testing regime was came on page 93 of the incendiary report into HBOS’s failures published 10 days ago.

It revealed how consultants told HBOS it was more likely to fail through an “external event” such as a terror attack or even an earthquake than as a result of a collapse in commercial property prices – the scenario then used by regulators.

The new tests are likely to have proved much tougher for banks to have passed, with close attention set to be paid to Standard Chartered, and to a lesser extent HSBC. Asia-focused Standard Chartered is attempting a turnaround after a string of profit warnings and a $5.1bn (£3.4bn) rights issue, and could struggle with the Bank of England’s current scenario, which calls on banks to gauge the impact of a slowdown in Asia, eurozone deflation, and a 20 per cent fall in UK house prices.

Despite the tougher scenario, all seven of the banks being tested are expected to pass, but could be told to set aside more capital as a buffer against shocks. The results will be published tomorrow morning, and banks have been warned not to reveal them early.

The Bank of England said Co-op Bank’s capital would have been wiped out had last year’s scenario – a UK recession and 35 per cent fall in houses prices – come true. Lloyds and Royal Bank of Scotland only narrowly avoided failing that test after hurriedly revising their capital plans to avoid falling into the same trap.

This year’s tests are more internationally focussed tests and so could challenge Barclays, which has a significant international business. RBS still retains some international operations.

The results come ahead of even tougher tests next year, which will look at banks’ capital based on where the Bank thinks Britain is in the economic cycle, in addition to creating a new disaster scenario to see how they would cope.

Governor Mark Carney said earlier this year that the tests were important because “the United Kingdom needs banks than can weather shocks without cutting lending to the real economy”.

Several Bank policymakers have been at pains in recent weeks to say the amount of capital banks already hold is in the right ballpark. But analysts think the so-called countercyclical buffer, which was set at zero in September, could be tweaked up to 0.5% on Tuesday. This buffer was introduced to push against banks keenness to lend in boom time only to turn the lending taps off when things get tougher.

The HBOS report, overseen by the Bank, said its consultants had also judged that the wipe out of HBOS’s profits for three years “had a one in 5,000 years likelihood; and that a three year recession had a likely probability of one in 350 years”.

HBOS had said that it took “some comfort on the robustness of the overall portfolio and our ability to withstand a downturn without materially impacting on the profitability of HBOS or threatening its survival” from the Financial Services Authority tests.

The report went on to describe the bank’s assumptions as “insufficiently conservative”.