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Bank of England stress tests pass all banks apart from Co-op

[LONDON] All Britain's main banks would be able to withstand a sharp fall in house prices, other than the troubled Co-operative Bank, the Bank of England said on Tuesday.

State-backed RBS and Lloyds only scraped through the BoE's first sector-wide test of the health of major lenders after both took pre-emptive measures to shore up their capital defences before the BoE reached its conclusions.

Both banks will need to seek permission from the BoE's regulatory arm before paying any dividends.

Britain pumped 66 billion pounds into Royal Bank of Scotland and Lloyds Banking Group to keep them afloat during the financial crisis of 2007 to 2009, prompting a shake-up in the way banks are supervised.

The BoE's Financial Policy Committee, which is tasked with dealing with potential risks to the economy from the banking system, recommended that banks be tested regularly to check they have sufficient capital to withstand market shocks.

The FPC said Tuesday's tests showed that Britain's banking system was much safer than just a couple of years ago, and that no new sector-wide protective measures were needed. "The results show that the core of the banking system is significantly more resilient (and) that it has the strength to continue to serve the real economy even in a severe stress," BoE Governor Mark Carney said.

The FPC said it would set additional bank risk buffers which take account of the dangers posed by credit booms at zero for now, but urged banks to improve governance to tackle recent misconduct and operational failures.

A feared increase in risks from Britain's housing market - which the BoE said in June was the biggest threat - has so far not occurred, though household debt remained high.

The BoE stress test adds a number of additional layers on top of those applied by European regulators in an EU-wide test of 123 banks in October.

The BoE's doomsday scenario features a slump in the value of sterling and a build up of inflationary pressures, leading to a tightening of monetary policy and a rise in interest rates to 4 percent from 0.5 per cent currently.

Those factors cause the country's economic output to fall by about 3.5 per cent from the end of 2013 and the unemployment rate to almost double to 12 per cent.

House prices subsequently fall by 35 per cent and commercial property prices by 30 per cent.

Britain's biggest eight lenders - Lloyds, RBS, Barclays , HSBC, Santander UK, Nationwide , the Co-op and Standard Chartered - needed to show they held enough core capital to withstand the scenarios without needing extra funds.

The test requires them to have a core capital ratio of at least 4.5 per cent of risk-weighted assets under the scenarios.

Co-op, which nearly collapsed last year and fell under the control of bondholders after a 1.5 billion pound capital shortfall was identified, had already warned it might fail the test.

The stress test showed that Co-op's core capital ratio would sink to -2.6 per cent, even after taking previously announced measures. RBS and Lloyds's ratios would fall to 5.2 per cent and 5.3 per cent respectively.

The BoE said it "would ordinarily have required RBS to submit a revised capital plan", but that it deemed this unnecessary as RBS had announced it would raise extra capital while the stress tests were underway.

Barclays scored 7.5 per cent, HSBC 8.7 per cent, Nationwide Building Society 6.7 per cent, Santander 7.9 per cent and Standard Chartered 8.1 per cent.

The BoE said that this year's stress test scenario was tougher on banks with high exposures to British mortgages, such as RBS, Lloyds and Nationwide.

A stress test focused on emerging market shocks - which would affect HSBC and Standard Chartered more - could come in future, and the BoE said that in 2015 it would also assess banks' leverage ratio as well as capital levels in future.