Commenting on the PRA stress test results | KPMG | UK

Steven Hall, banking partner, comments on the PRA stress test results

Commenting on the PRA stress test results

We calculate that in aggregate the sector has a buffer of £115bn of capital as of Q3 2015.


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All the banks pass yet another stress test

Commenting on the PRA stress test results, Steven Hall, banking partner, KPMG said

“Another stress test and another festive celebration as all the banks pass. However the overall severity of the stress impact on CET1 capital levels is higher this year compared with last year.   The good news for UK banks is that by combining today's stress impacts with the additional capital accretion and asset reductions they have completed in 2015 would mean all 7 banks would pass the tougher stress test hurdle that the PRA will apply from next year. We calculate that in aggregate the sector has a buffer of £115bn of capital as of Q3 2015.

The bad news is that if one combined this year’s scenario (trading and conduct related) with last year’s UK domestic property-related shock, we estimate that the aggregate CET1 capital ratio would not meet the proposed 2016’s combined hurdle with an estimated £23 billion shortfall in CET1 capital.

The importance of potential misconduct costs eroding capital has been recognised with significant impact from stressed conduct losses for the first time in today’s results.  Similar to last year, the banks made significant improvements in their capital and leverage positions in the run up to the start of the test and have maintained that momentum during 2015. We calculate CET1 was boosted by an average 1% whilst leverage ratios increased 0.3% as banks faced a leverage hurdle for the first time. 

There is little concrete about where the countercyclical stress for 2016 might land although a return to commercial real estate looks likely which will bring the focus back on the domestic focused lenders.

This year’s results maintained the focus on the quality of the actual process with the PRA completing a review of model risk management for the first time.  With firms spending tens of millions of pounds each year on the stress testing exercise, ensuring that they get some ‘bang for their buck’ is crucial, especially as firms are focused very much on cost-income ratios.

Although policymakers resist the term Basel 4, the wide-ranging changes proposed to the whole Risk Weighted Asset regime look set to add another ingredient into the stress-testing soup when we look beyond 2017.”

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