Co-operative Bank fails Bank of England stress test

Bank would not withstand a crisis with current set up.

The Co-operative Bank has failed the first simultaneous stress test of the UK banking system.

Two other banks - Lloyds Banking Group and Royal Bank of Scotland - were found to be at risk in the event of a "severe economic downturn".

Stress testing

The Bank of England stress tested eight major banks and building societies on their resilience to a range of worst case scenarios.

These included a 35% drop in house prices, a 30% fall in the value of the pound, the unemployment rate rising to 12%, inflation rising to 6.6%, interest rates rising to 4.2%, share prices falling by 30% and gross domestic product (GDP) falling 3.5%.

Five of the major banks passed the test including Barclays Bank, HSBC Bank, Nationwide Building Society, Santander UK and Standard Chartered.

But the Co-operative Bank, Lloyds Banking Group and Royal Bank of Scotland (RBS) were found to be in need of strengthening their capital position. In other words, they need more cash reserves to cover themselves if the worst happens.

The Bank of England said Lloyds Banking Group and RBS already had concrete plans to build capital.

But the Co-operative Bank, which had to be rescued last year after a £1.5 billion black hole was found in its balance sheet, was the only bank required to submit a "revised capital plan".

Response

The chief executive of Co-operative Bank, Niall Booker, said he wasn’t surprised the lender had not passed the test, but pointed out the Bank was on track to "significantly reduce risk weighted assets".

Mark Carney, Governor of the Bank of England, said “this was a demanding test” and the results show the UK banking system is “significantly more resilient”. He added: “The growing confidence in the system is merited.”

More banking:

HSBC credit card now offers 34-months 0% interest

Treasury and banks agree to fee-free basic accounts

Royal Bank of Scotland Group fined £56 million for 2012 IT disaster