The BBA is now integrated into UK Finance. Please go to www.ukfinance.org.uk for new content and updates from UK Finance.
Material published by BBA prior to 1st July 2017 is still available on this website.
From 1 July 2017, the finance and banking industry operating in the UK will be represented by a new trade association, UK Finance. It will represent around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation will take on most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association.x
You could fill a library several times over with online commentary on the causes of the 2008 crisis, and talk of the systems that have been put in place to prevent a repeat aren’t far behind.
But what of the response to regulators’ recent stress testing requirements? Specifically, how should analysts use these findings when assessing the creditworthiness of a bank? How might these results impact on the credit facilities that are offered to a client bank?
The concept of stress testing by regulators – which boils down to determining if a bank has sufficient capital under a series of highly negative scenarios – began in 2009.
Regulators in many countries now require minimum annual stress tests for systemically important banks, under conditions specified by the regulator. Some, like the US, UK and the European Banking Authority (EBA), give detailed disclosures on bank performance under stress. Other central banks publish a Financial Stability Report that is light on bank-specifics but provides insight into the broader issues facing banks in those markets.
Good work is being done here. But these tests aren’t perfect, and third-party assessment should usually entail a lot more than simply accessing these test results on their own.
Let’s look at why.
The tests and associated regulations deal primarily with key performance ratios. But in isolation and as a one-size-fits-all measure, these are usually insufficient for tailored third-party assessment, given the many differing variables from one bank to the next.
The stability of a bank – and therefore whether and how you should do business with it – calls for a more holistic approach; look at its stress testing results, certainly, but also scrutinise the context. Other financial data, where the bank is based, its corporate ownership structure, performance of its management, micro-economic factors peculiar to the specific sectors it serves: these factors and many more should also feature on your consideration radar, and should contribute to your capital expectations of them.
Later this month, Sarah de Quant of Adeva Partners and I are hosting a webinar on using enriched data sources to evaluate the credit standing of banks in different markets.
How much capital is enough? Evaluating – what do we know post financial crisis? takes place online at 3pm GMT on Thursday 16th March.
We will look at financial indicators that showcase management actions and discuss whether the high levels of total loss absorbing capital should give us comfort or concern. Might these strong figures possibly weaken the political will that drove these reforms?
Register here to attend.