Co-operative Bank fails Bank of England stress test

The Co-operative Bank has failed a stress test from the Bank of England, designed to judged its resilience to a severe housing market shock. Following the test on...

The Co-operative Bank has failed a stress test from the Bank of England, designed to judged its resilience to a severe housing market shock.

Following the test on its balance sheet at December 2013, the Prudential Regulation Authority board decided that the bank needed to strengthen its capital, but did not require it to raise additional equity capital.

Out of eight banks, the Co-operative Bank, which separated from the Co-operative Group last year following the discovery of a £1.5bn capital hole, was the only one that was required to submit a revised capital plan, which was accepted.

The plan envisages a reduction in the bank’s risk profile and size of its balance sheet, as a means of reducing its capital requirements. In response, the bank said that since December 2013, it raised an additional £400m of capital in May and disposed assets, which had improved its capital position. It also said that it does not expect to make a profit until 2018, when its non-core division should be significantly reduced in size.

The Bank of England said the bank’s capital resources are projected to be exhausted in the hypothetical stress scenario, which predicted a 35% drop in house prices and 30% fall in sterling. It said that a key source of vulnerability for the Bank in the scenario stems from the portfolio of historic, higher-risk residential mortgages and commercial real estate assets.

It added: “The Co-operative Bank has achieved the targets set over the past 18 months in terms of building its capital base. The PRA expects all firms to maintain capital buffers that provide insulation against stress scenarios. The results of this exercise provide an updated quantitative estimate of the bank’s vulnerability to a severe housing-related stress.”

Niall Booker, chief executive of the Bank, commented: “The Bank is much stronger than a year ago. As the regulator notes today, we have achieved the target of building our capital base and the actions we have taken during the first year of our business plan have made the Bank more secure for the benefit of all stakeholders.

“Our revised plan, accepted by the regulator, will see us accelerate our strategy to significantly reduce risk weighted assets. As we have indicated before this will be driven primarily through a reduction in Non-core assets and the exit of certain portfolios which are vulnerable to this type of stress. This will build greater capital resilience earlier than previously anticipated.”

He added: “Under the management team brought in to strengthen and simplify the business, we are reshaping the Co-operative Bank around our individual and small business customers. We have begun reinvesting in our brand and re-engaging with customers on the values and ethics that we share and that make us different. There is, of course, more to do but, given a continuation of recent positive market developments, I’m confident the steps we are taking are building a stronger and better business for our customers, colleagues and shareholders alike.”

Mark Carney, governor of the Bank of England, said: “The stress test completes our capital framework by informing judgments about the appropriate size of capital buffers for individual firms and for the system as a whole. It is a major component of both our macro- and micro-prudential regimes. As a joint exercise between the PRA and FPC, it demonstrates the major synergies possible across the Bank of England. This was a demanding test. The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited.”

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