By Huw Jones
LONDON (Reuters) -Britain's eight largest lenders have enough capital to ride out a worse economic crisis than that seen in 2008, the Bank of England (BoE) said on Wednesday, as the sector faces sharply rising interest rates pummelling consumers and businesses.
The test checked if banks had enough capital to weather theoretical shocks under a scenario which the BoE said was more severe than the global financial turmoil of 2008 when British taxpayers had to bail out several lenders.
The test also measured how well the lenders would cope with a global rise in interest rates.
The eight banks account for 75% of lending in Britain.
"The UK economy and financial system have so far been resilient to interest rate risk," BoE Governor Andrew Bailey said, though he noted the full impact of higher interest rates had yet to be felt.
The stress tests incorporated persistently higher inflation in advanced economies, rising global interest rates, deep recessions and higher unemployment, as well as sharp falls in asset prices.
"Major UK banks’ capital and liquidity positions remain robust and profitability has increased, which enables them both to improve their capital positions and to support their customers," the BoE said.
There was no common pass mark but each bank had to scale a bespoke hurdle, with Barclays (LON:BARC), Lloyds (LON:LLOY), HSBC, NatWest, Santander (BME:SAN) UK, Standard Chartered (OTC:SCBFF), Nationwide Building Society and Virgin Money (LON:VM) all showing no capital inadequacies, the BoE said.
Bank shares rose strongly in response, with Virgin Money up 6.7% on the day and Lloyds 2.8% higher. Shares for the other major British banks were up around 1.4-1.6%.
Bailey said that the soundness of the financial system meant that banks were better able to pass higher interest rates to savers.
The central bank said it had decided to maintain its counter-cyclical capital buffer for banks unchanged.
"This will help to ensure that banks have sufficient capacity to absorb future shocks without unduly restricting lending," the BoE said.
NatWest, Britain's biggest lender to small businesses, said the test highlighted the group's "all weather" balance sheet.
Lloyds, Nationwide, HSBC and Standard Chartered also noted their successful performance in the test.
The central bank said it was looking jointly with the finance ministry at potential options for winding down small banks after recent events in the United States where Silicon Valley Bank collapsed and Britain had to engineer a takeover of its UK subsidiary.
"Deposit outflows at some regional U.S. banks were large and rapid, with digital banking technology and social media playing a role in increasing the speed at which information was shared and deposits withdrawn," the BoE said.