KPMG comments on the BoE’s 2022/23 cyclical stress testing

Peter Rothwell, Head of Banking at KPMG in the UK, comments: “The results show that banks remain resilient and the system has capacity to support households and businesses through a period of higher interest rates.

“All banks were safely above the hurdle rates for CET1 and leverage ratio. However, there is a clear warning to investors that in the event of a severe stress, banks would reign in distributions*.

“The results suggest a squeeze in Net Interest Income (NII). With interest rate increases likely to be passed on to customers and mortgage rates at their highest level in 15 years this could see the banks looking to reduce dependency on NII and move to both retain deposits and increase commission in mass affluent sectors and wealth rather than savings products.”

Michelle Adcock, KPMG UK’s Prudential Banking Sector Lead for the EMA Financial Services Regulatory Insight Centre (RIC), adds: “Banks were facing the testing with improved asset quality compared to the last ACS in 2019 as well as higher deposit balances, and as a result the ACS scenario itself was the most robust banks have faced yet. While the base rate scenario of 6% is not unrealistic, other elements of the stress test were severe based on current macro projections. 

“This was the first time the ACS has required banks to report at both group and ring-fenced bank (RFB) level. The test did not reveal capital inadequacies or require any banks to submit revised capital plans, at either group or ring-fenced bank level.

“Attention will now turn to the proposed integrated exercise between sectors that will provide a more wholistic view on the impact of shocks on the wider financial ecosystem and identify any weaknesses in links between the sectors.”

Doubling down on the detail, Peter Rothwell adds: “Interestingly, what is not detailed in the results is the direct impact on non-fair value – such as Hold to Collect (HTC) – which was the catalyst for the issues in the US regional banking sector earlier this year. However, this may be because the liquidity profile of UK banks** somewhat dissipates this risk.”

-ENDS-

Notes to editors:

*Dividends, variable remuneration, and AT1 discretionary coupons would be cut substantially in such a stress.

**The report states that only 10% of £1.4 trillion liquid assets are HTC.

For further information please contact:

Helen Jackson, KPMG Corporate Communications

M: +44 (0) 7901115649

E: helen.jackson@kpmg.co.uk

Alastair Henry, Citypress

M: +44 (0) 7901115649

E: KPMGfs@citypress.co.uk