UK banks pass CEBS stress tests

Royal Bank of Scotland, HSBC, Barclays and Lloyds Banking Group were all tested, as was Bank of Ireland.

The EU-wide stress test exercise was conducted by the Committee of European Banking Supervisors (CEBS). The CEBS exercise showed that the UK banks are well placed to handle further periods of economic stress, as outlined in the macro economic parameters detailed by CEBS, should such stress develop.

The purpose of the stress test was to understand the extent to which banks are prepared should the economic environment take a turn for the worse. It is not a prediction of what will happen or what banks’ results will actually be and the CEBS stress test did not take into account actions a bank might take in response to deteriorating economic conditions.


It focused on three different scenarios; a benchmark stress, a more adverse macro-economic stress and a country-wide stress.

The benchmark stress identifies movements in parameters such as GDP, unemployment and interest rates and charts a mild deviation away from the pathway which the economy is currently on: it then makes conservative assumptions about the loan losses which will result in this macro-economic scenario. This helps to set a benchmark (mildly stressed scenario) against which the more adverse stress is then applied.

The adverse stress assumes a 3% deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon. The method of translating this scenario to loss rates is also conservative.

A further ‘sovereign stress’ was then applied. This tested the resilience of banks to an increase in the yields of government bonds issued by EU member states. It simulates:

  • the associated medium term uptick in household and corporate sector loan losses in the banking book, and
  • immediate mark to market losses arising from trading book holdings of government bonds of each country.
The actual exposure of each bank to central and local government across the EU have been published by each bank.

Results identify the simulated Tier 1 ratios of European banks as well as specific simulations for profit and loss measures. The CEBS results focused on Tier 1 ratios for comparability across the EU.

UK banks resilient

As expected the outcomes of the stresses demonstrated the “preparedness and resilience of the UK banks under unlikely adverse economic scenarios” according to the FSA.

“This resilience is a result of the considerable work that has been undertaken to strengthen UK banks in recent years,” according to the regulator.

The CEBS stress test is different but complementary to the FSA’s stress testing regime.

Commenting, Barclays said: “Barclays regularly conducts its own internal stress testing as part of its overall risk management framework based on adverse macro-economic shocks and adverse conditions in financial markets, including government bond markets.

“Barclays has also been subject to annual external stress tests across all its books by the FSA since the FSA’s stress testing framework was instigated in 2009.

“In each stress test, whether internal or external, Barclays has demonstrated that its capital position and resources are sufficient to meet its regulatory capital requirements.”

Lloyds Banking Group said: “Lloyds Banking Group has a robust capital position that reflects the significant capital raising undertaken in 2009.

“The Group continues to meet comfortably the higher capital standards introduced by the FSA since the financial crisis began.”


But stress tests raised more questions than they answered, according to a City expert.

Mark O’Sullivan, director of dealing at leading foreign exchange firm Currencies Direct, said: “As expected a handful of small Spanish unlisted saving banks and a Greek bank have failed the EU bank stress tests.

“What seems to have occurred is a compromise amongst European banking regulators, with many questioning if the bar had been set way too low in testing the European banking sector.

“It seems the tests may have raised more questions than they have answered and in the coming weeks it will be the Interbank lending markets that will have the real answer as to whether real confidence has returned to the European banks.”