Deloitte comments on this morning's Interim Financial Stability report

Today in its Interim Financial Stability report, the Financial Policy Committee (FPC) has announced the results of a desktop stress test. It shows that the largest UK banks are able to withstand a series of severe economic and market shocks resulting from the impact of COVID-19 on the UK and other major economies. The impact on banks’ capital is less than in the FPC’s 2019 annual stress and reinforces the FPC’s consistent message that the banking system has the capacity to support UK lending.

David Strachan, Head of Deloitte’s EMEA Centre for Regulatory Strategy, comments:

“This is welcome and reassuring news. However, as is always the case when comparing and interpreting the results of stress tests, the key is to look at what assumptions underpin them. In the FPC’s desktop exercise, interest rates are assumed to remain low and banks are assumed to benefit from borrowers having access to various government support schemes. In addition, the FPC assumes that, because they are loss-making, banks pay no dividends in 2020/21 and reduce the variable remuneration paid to material risk takers by 50%. This assumption results in banks retaining around £45bn of capital which they might otherwise have paid out.

“The Prudential Regulation Authority (PRA) has also made a technical, but important, change to the way in which one of the bank capital buffers (Pillar 2A) is calculated, so that the buffer is expressed as a nominal amount, rather than as a percentage of capital requirements. This means that as banks increase their lending, including under government support schemes, the Pillar 2A capital buffer will not rise commensurately. This will give banks more headroom to make new loans. It is further evidence of the PRA’s determination to ensure that, where it is prudent to do so, its capital framework should work in support of government lending schemes.”

End

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