The UK’s big four banks are down despite passing the European regulator’s annual stress test. While that may look positive on paper, the Bank of England (BoE) is already warning the sector's giants that its own financial health examination will be tougher.
Concerns about how Barclays (BARC), HSBC (HSBA) and Royal Bank of Scotland (RBS) will fare under the prying gaze of the BoE is acting as a drag on share prices. Yet it is at Lloyds Banking (LLOY) where the biggest worries lay, hence its particularly poor share price performance on Monday 27 October, the stock sliding 2.3% to 74.94p, the Footsie's second biggest faller.
EU Stress Tests stats (best to worst):
Bank (% reserves-to-assets buffer)
Lloyds barely scraped through the EU's Asset Quality Review, and the market is worried about the potential implications this could hold for future dividends. Some of the bigger sceptics in the City are now wondering if Lloyds may have to go cap-in-hand to shareholders to raise more cash in order to strengthen its reserves.
The European Banking Authority (EBA), the EU regulator, tested 123 banks against a fictional set of recession dynamics in order to assess whether each bank's balance sheet would be strong enough to cope. The EBA were particularly looking to see if banks' reserves would fall below 5.5% of their assets.
The test was designed to determine if banks would avoid a bail-out should another financial crisis shock the system in future. Banks in Greece, Portugal, Ireland, Belgium and Italy were among the 24 lenders that failed and have nine months to strengthen their balance sheets.
The BoE's UK stress test factors a potential housing market crash into its own scenario. It will publish the results on 16 December.