Bank of England announcement of latest stress tests – Thoughts from 4most’s Chris Warhurst

Yesterday the Bank of England kicked off the 2017 stress testing season with publication of two economic scenarios.  While the second Annual Cyclical Scenario (ACS) looks at capital positions under stress and – given the economic assumptions are little different from last year, succeeds in its aim of making the exercise predictable – the first ever Bank Exploratory Scenario (BES) tests the banks’ ability to react to a world where the picture is one of compressed profit margins and competition for funding.

Banks cut budgets for maths and models as rules change

The FT covered a piece on a regulatory crackdown that it claims removes the key incentive for measuring risk – view the full article here  Here is our response - this certainly covers the impact for investment banks as rather than retail.  What BCBS have announced is that they are potentially withdrawing IRB treatments for exposures against large corporates and other banks.

A Quiet Crisis?

While Brexit may be dominating the headlines at the moment, some experts believe that a debt of €360bn in bad loans within a fragmented Italian banking sector, could be the biggest threat of all. The suggestion is that even a “small crisis” could trigger a chain of events that could potentially threaten the stability of the European Union, credit ratings agency Moody’s is reported to have said.

Challenger banks – challenges ahead?

We’ve got quite used to hearing the misery and bad news associated with UK banks since the financial crisis, yet one of the positive sides to this debate has been the rise of the challenger banks. These secondary players have grown quickly, with several listing last year as the sector continues to attract both customer and investor interest. The challenger banks have also long been praised by some politicians as being responsible for injecting much-needed further competition into the UK banking sector.

Good regulation vs. rules with unintended consequences

Regulations that aim to increase understanding of risks for management, investors and the general public are effective, self-reinforcing and are likely to change emergent behaviour. Market wide stress testing initiatives have been particularly powerful in this regard – by requiring banks to consider explicitly the worst scenarios and publish the outcomes, the market has been driven to protect and plan for those events.

IFRS 9 – The impact on collections strategy and performance

At this stage, most organisations are well on their way to coming up with a compliant solution for the new accounting standard IFRS9, which becomes mandatory on 1 January 2018. Management teams are also starting to understand the direct impact of IFRS9 to their profit and loss (P&L) and as a result, thought naturally leans towards the secondary impacts of the implementation of this regulation.

Challenger Banks call for more support from Chancellor

Challenger banks have welcomed moves to allow them to operate with lower capital than their larger “too big to fail” banking rivals. Chief Executive of Secure Trust has been reported to have said that small banks need to get bigger and take business away from the bigger banks believing it is the only way in which the taxpayer will be off the hook for bailing out ‘too big too fail’ banks in the future.

A stress test that can’t fail?

Last week the headlines unveiled ramblings of a new stress test from Europe’s top banking regulator, which it suggests is impossible for the region’s lenders to fail.  True?  Well, the watered-down, stress-free stress tests come at a time of market chaos, according to reports, and also amid investor concerns over the strength and stability of the European banking industry.