MNI POLICY:UK Banks Pass Stress Test,Funds Face Stricter Rules

By David Robinson

     LONDON (MNI) - Major UK banks all passed stress tests measuring their

ability to withstand deep simultaneous recessions in the UK and global

economies, the Bank of England Financial Policy Committee said, announcing it

would crack down on liquidity mismatches at open-ended funds.

     Following are key points from the Financial Policy Committee's Financial

Stability Report and accompanying bank stress tests:

     --The BOE tested banks' resilience against a more severe world recession

than occurred during the global financial crisis, with global GDP falling by

2.6%, UK unemployment rising to 9.2% and Bank Rate to 4% from its current 0.75%.

     In these adverse conditions, the BOE's assessment was that the major banks'

common equity Tier 1 ratios would only fall from their current level of greater

than three times the level before the global financial crisis to around two

times.

     --Banks will have to raise their countercyclical capital buffers to 2% from

1% in a year's time. These buffers are designed to boost bank capital in stable

times so that they can continue to lend during an economic downturn. The

increase to 2% would result in the major banks adding another stg23 billion to

their buffers, which the BOE estimated would cover some stg500 billion of

lending.

     -- The FPC announced moves to address the mismatch faced by open-ended

funds investing in relatively illiquid assets. The FPC said there "should be

greater consistency between the liquidity of a fund's assets and its redemption

terms" and warned this liquidity mismatch posed a potential systemic risk.

     Liquidity of funds' assets should be assessed and redeeming investors

should receive a price that reflects discounts necessary to speedily dispose of

assets, the FPC said.

     "Redemption notice periods should reflect the time needed to sell the

required portion of a fund's assets," the FPC said.

     -- Some open-ended funds offer daily redemptions but many of their

investments, such as those in the property sector, are in relatively illiquid

asset. The UK has been an outlier, with Germany and the U.S., in clamping down

on OEFs' liquidity mismatches. The UK has also seen high profile fund failures,

such as the Woodford debacle.

     --The FPC also announced it was keeping in places its curbs on bank

mortgage lending, namely a flow limit on loan-to-income ratios and an interest

rate stress test for borrowers based on a three-percentage point rise in the

mortgage rate.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MT$$$$]