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BoE Cancels Stress Test For Major Banks On Coronavirus Woes

By Zacks Investment ResearchStock MarketsMar 23, 2020 12:26AM ET
www.investing.com/analysis/boe-cancels-stress-test-for-major-banks-on-coronavirus-woes-200518291
BoE Cancels Stress Test For Major Banks On Coronavirus Woes
By Zacks Investment Research   |  Mar 23, 2020 12:26AM ET
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The novel coronavirus outbreak has been affecting global markets. The fear of its financial impact pushed central banks to take some major decisions. In its latest move, the Bank of England (“BoE”) canceled the 2020 annual stress test of eight major U.K. banks and building societies.

Royal Bank of Scotland (NYSE:RBS) , Barclays (NYSE:BCS) , HSBC Holdings (NYSE:HSBC) , Lloyds Banking (LON:LLOY) Group (NYSE:LYG) and Standard Chartered (OTC:SCBFF) are among those, who are concerned with the news.

“These measures will provide flexibility to help firms and FMIs maintain their safety and soundness and deliver the critical functions they provide to the economy,” the central bank said.


Some other steps taken by the BoE to free firms from operational burdens amid the virus spread is the delay of a planned survey, which was to be conducted into 300 open-ended funds.

The BoE is mulling to focus on unavoidable matters only related to financial stability. Also, it will closely coordinate supervisory work on Covid-19, wherever possible, with the Financial Conduct Authority and other authorities.

Further, the central bank acted upon the banks’ concerns over the implementation of stricter rules known as IFRS 9. Under this rule, banks will need to cover loans provided to distressed borrowers prior to any default. BoE said that it is considering the potential interaction of Covid-19 with IFRS9 and seeks to guide firms in the coming week.

“The Prudential (LON:PRU) Regulation Authority (FRA) reminds firms that forward-looking information used to incorporate the impact of Covid-19 on borrowers into the expected credit loss estimate needs to be both reasonable and supportable for the purposes of IFRS9. Given the sudden onset of the virus, the PRA believes that there is very little such information available as yet, and regards the preparation of reliable and detailed forecasts as very challenging currently,” the BoE added.

The move came after European Banking Authority announced that it will defer the banks’ health check-up that takes place every two years so that the firms are better focused to deal with the challenges arising due to the virus outbreak.

Further, the U.S. central bank slashed interest rates to zero (for the first time since the 2008 financial crisis). The Fed announced the deployment of $700 billion to buy Treasury securities and agency mortgage-backed securities to aid the "flow of credit to households and businesses" to combat the impact of the pandemic, and boost the economy and banks’ liquidity.

Our Take

Heightened fears over a recession and a global economic slowdown will likely have an adverse impact on the performance of banks as it will lead to an unimpressive lending scenario, owing to reduced business activities.

However, per the resultsof the laststress test, the U.K. banking system showed lenders to be “resilient to deep simultaneous recessions in the U.K. and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs.”

Also, easing of rules by the regulators, such as cutting down requirements to hold “counter cyclical” buffer to boost banks’ liquidity, may help lenders remain afloat during such uncertainty.

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Royal Bank Scotland PLC (The) (RBS (LON:RBS)): Free Stock Analysis Report

Barclays PLC (BCS): Free Stock Analysis Report

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Lloyds Banking Group PLC (LYG): Free Stock Analysis Report

HSBC Holdings plc (HSBC): Free Stock Analysis Report

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Zacks Investment Research
BoE Cancels Stress Test For Major Banks On Coronavirus Woes
 

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BoE Cancels Stress Test For Major Banks On Coronavirus Woes

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