Worst Performers In EU Bank Stress Test Include Lloyds And Barclays

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Both Lloyds and Barclays surprised the markets last Friday after being identified and shamed in the banking health check of the European Union.

The two lenders of Britain were included among the worst performers in the most recent report of the banking watchdog of the European Union, which tested banks in Europe and their ability to withstand a hypothetical market shock.

While none of the 48 lenders slipped below the major capital threshold, Lloyds and Barclays saw their loss-absorbing buffers dive to levels that are already close to what the investors consider as the bare minimum that is required to survive a theoretical economic crash.

A banking partner at KPMG UK, Rob Smith, disclosed: “In a surprise set of results, UK banks have fared worse than their European counterparts as IFRS9, combined with high levels of unsecured debt, took its toll on capital.”

Smith continued: “However, you have to consider that the UK was tested against a far more severe scenario than most other countries. In spite of the heavy losses, UK banks still withstood the incredibly tough test.”

All of the banks continued to be above the unofficial level (5.5 percent) that is used by analysts and experts in order to determine the vital amount of capital that is required in case of emergency shocks such as extreme political volatility and a recession. Barclays ended up with a core capital ratio amounting to 6.37 percent and Lloyds had 6.8 percent in the adverse scenario. The European Banking Authority (EBA) said that both were marked down because of their exposure to riskier credit.

The report was the toughest “stress test” of the EBA ever since it started the said exercise in 2009 to identify the capital holes and avoid any repeat of the government bailouts that were triggered by the financial crisis in 2008.

The said test also discovered that the Banco BPM of Italy and NordLB, the German state-owned bank, had some of the weakest loss-absorbing buffers within the European Union.