# Lloyds Bank comfortably passes Bank of England stress test

- Link: https://www.directorstalkinterviews.com/lloyds-bank-comfortably-passes-bank-of-england-stress-test/4121123749
- Published: 2023-07-12T07:34:36+01:00
- Author: Amilia Stone

**Lloyds Banking Group plc** ([LON:LLOY](https://www.directorstalkinterviews.com/ftse-company/lloyds-banking-group-plc/lloy.l)),
together with seven other financial institutions in the UK, has been subject to 
the 2022 annual concurrent scenario stress test (ACS), conducted by the Bank of 
England (BoE). The 2022 ACS also assessed the ring-fenced subgroups of the participating
banks on a standalone basis for the first time.

The Group is pleased to note that it has comfortably passed the stress test and 
given this strong performance, the Group is not required to take any capital actions.
The BoE calculated the Group’s transitional CET1 ratio after the application of 
management actions as 11.6 per cent and its leverage ratio as 4.5 per cent. Despite
the severity of the stress test scenario, and without the conversion of the Group’s
AT1 securities into equity, the Group significantly exceeded the capital and leverage
hurdle rates of 6.6 per cent and 3.5 per cent respectively.

The ring-fenced bank (RFB) also passed the stress test, with the BoE calculating
the RFB’s transitional CET1 ratio after the application of management actions as
12.1 per cent, against the hurdle rate of 7.2 per cent.

The 2022 ACS scenario was designed to test the resilience of the UK banking system
to deep, simultaneous recessions in the UK and global economies, with large falls
in asset prices and higher global interest rates. The BoE stated at the outset of
the exercise that the focus of this hypothetical scenario was to ensure that banks
were able to absorb rather than amplify shocks, and continue to lend to UK households
and businesses. The scenario was more severe than the last global financial crisis
and combined rapidly rising interest rates and unemployment, in conjunction with
significant falls in property prices and GDP. In particular, base rates rose to 
6 per cent in the first year before gradually reducing to 3.5 per cent in subsequent
years; inflation increased to 17 per cent and took five years to recover to the 
Bank of England’s 2 per cent target; GDP fell by 5 per cent in the first year, unemployment
peaked at 8.5 per cent in the second year, and UK house and commercial property 
prices fell 31 per cent and 45 per cent respectively over the first three years.
In addition to these economic factors, and in line with previous years, the stress
scenario also reflected other risks such as conduct, alongside a traded risk scenario.

This year’s stress test was again run under the IFRS 9 accounting standard and required
the immediate recognition of expected credit losses on a perfect foresight basis,
rather than reflecting losses as they were incurred. The BoE assessed the stressed
projections on an IFRS 9 transitional basis, in line with the phased implementation
approach of the standard. Results are also shown on an IFRS 9 “fully-loaded” non-
transitional basis. The Group as a whole, as well as the RFB separately, comfortably
exceeded both the transitional and non-transitional hurdle rates in this stress 
test.

This result reflects Lloyds Banking Group’s prudent balance sheet management and
strong capital position, having reported a CET1 ratio of 14.1 per cent and a UK 
leverage ratio of 5.6 per cent, post dividend accrual, at 31 March 2022. The Group
also continues to be strongly capital generative with capital build over Q1 2023
of 52 basis points, including the accelerated full-year £800 million payment of 
fixed pension contributions for 2023.

**Further details**

Details of the BoE’s approach to the stress test and the detailed results in relation
to all participating financial institutions are available from the BoE website.

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