LONDON, March 27 (IFR) - Global GDP will fall by 2.4%,
sterling plunges against the dollar, UK interest rates rise to
4% and US corporate bond spreads will widen by 1,150bp under the
2017 "stress test" scenario for Britain's big banks.
The Bank of England set out stress test scenarios on Monday
for this year's health check of seven bank and building
societies. The annual test is aimed at making sure they are
resilient enough to withstand a deep global and UK recession and
severe stress in financial markets.
Most scenarios are similar to last year's test, but some
have changed as the Bank of England said global vulnerabilities
"are elevated and have increased somewhat over the past year".
Under this year's test the peak-to-trough fall in global GDP
will be 2.4%, compared with a 1.9% decline in the 2016 exercise.
UK GDP falls by 4.7%, compared with 4.3% in the last test,
although the stressed scenario for unemployment is kept the same
UK base interest rates rise to 4% under the 2017 stress
test, in contrast to last year's test, in which base rates were
cut to zero. The result is that banks will suffer higher losses
from bad loans, but benefit from higher interest income.
US corporate profitability falls and the cost of corporate
credit rises under this year's scenario. Ten-year US government
bonds yields rise to 3.5% and financial market participants
Investment-grade US corporate bond spreads increase to 515bp
from about 135bp and high-yield US corporate bond spreads widen
to 1,615bp from 465bp. The 1,150bp rise in high-yield is 100bp
more than in last year's test.
The sterling exchange rate index falls by 27% from its Q4
level and troughs at US$0.85 to the pound.
Oil prices fall to US$24 per barrel under the stressed
scenario, and remain at that level until 2019.
China's GDP growth falls from around 7% a year to a 1.2%
contraction by the end of 2017 under the test. Singapore's GDP
contracts by 7.2% and India's annual growth slows to 2.2%.
Other changes are similar to last year's test, including a
projected 56% fall in Hong Kong commercial real estate prices, a
40% drop in UK CRE prices and a 33% drop in UK residential
Banks will also have to apply misconduct fines and costs for
Analysts said the domestic stress of the test is similar to
the 2016 scenario, but the global stress looks tougher.
The results of the test will be released between October and
Each bank has to remain above a benchmark capital levels,
which have been set for each at the same as in 2016.
If they fall below that level under the stressed scenario
they will be required to take action, which could include having
the raise capital or stopping dividend or bonus payments.
The seven banks had to have a minimum common equity Tier 1
ratio of 6.5% on average under the 2016 test. The four most
globally significant - HSBC, Barclays, Royal Bank of Scotland
and Standard Chartered - had to hold slightly more capital.
RBS failed last year's test and had to submit a new capital
plan, which was accepted by regulators. Barclays and Standard
Chartered passed the test only after taking into account
"strategic management actions".
The Bank of England is also this year making banks go
through a second test at the same time, known as an "exploratory
That will test them over a seven-year horizon to capture
longer-term trends. It is not focused on bank capital adequacy,
but is about their business models and sustainability.
(Reporting by Steve Slater)