KPMG comments on the Bank of England’s 2022/23 cyclical stress testing results

Peter Rothwell, Head of Banking at KPMG in the UK, comments: “The results show that banks remain resilient and the system has capacity to support households and businesses through a period of higher interest rates.

“All banks were safely above the hurdle rates for CET1 and leverage ratio. However, there is a clear warning to investors that in the event of a severe stress, banks would reign in distributions*.

“While the ACS was a purely capital stress, the BoE is mindful of events earlier this year and took the opportunity to comment on the strong liquidity profile of UK banks. The detail of the report reveals that only 10% of liquid assets were categorised as Hold to Collect (HTC); the catalyst for the issues in the US regional banking sector. With US banking results about to be released, we may see these risks come back into focus.

“The BoE has made assumptions around deposits and a squeeze in Net Interest Income (NII). Looking forward, this may accelerate the move by banks to increase the proportion of fees and commissions that drive earnings, for example, by diversifying into wealth products in the mass affluent market.”

Michelle Adcock, KPMG UK’s Prudential Banking Sector Lead for the EMA Financial Services Regulatory Insight Centre (RIC), adds: “Banks came into this test with improved asset quality and higher deposit balances compared to the last ACS in 2019. The BoE points out that although the 6% base rate scenario no longer looks unrealistic, other elements of the scenario remain severe based on current macro projections.

“This was the first time the ACS has required banks to run the test at both group and ring-fenced bank (RFB) level, therefore it is encouraging that no capital inadequacies were revealed and no banks were required to submit revised capital plans, at either level.

“Attention will now turn to the proposed system-wide exploratory scenario (SWES) that will provide a more holistic view of the impact of shocks on the wider financial ecosystem and identify any weaknesses in links between the sectors.”

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