Stable Platforms

Yesterday's stress tests by the Bank of England (BoE) weren't exactly a banner morning for the UK banking industry. While Barclays, HSBC and Standard Chartered passed comfortably, having strongly increased their capital bases over the past few years in response to regulation (and regulatory uncertainty), RBS and Lloyds just about scraped through.

The Cooperative Bank, the financial arm of a UK provider of retail banking, funeral services, and, er, groceries, flat out failed it. Given all of the controversy that particular institution has attracted of late, it's not particularly good.

Shares rose after the results were released for RBS, Lloyds, Barclays, HSBC and Standard Chartered, but those gains were wiped out a few hours later.

The tests themselves were something of a fallacy ─ the BoE doesn't actually expect the scenario it envisaged to occur, and it didn't factor in many macroeconomic events, such as a widespread collapse in the Eurozone, but they were a strong indicator of just how prepared banks are to absorb the massive losses seen during the recent financial crisis.

Part of this is political football, with politicians keen to tap into the simmering resentment that still runs hot under the skin of the public toward the financial industry, saying that no longer will banks be given public funds for bail outs.

Except that they will, of course, if it's necessary to do so. Most sensible political and financial observers can adequately predict that the public will be a lot more cheesed off if we end up in some kind of Mad Max-cum-Fight Club end-of-days scenario where the financial system throws up its hands, says whatever, and starts racing buggies in Wembley Arena with Tina Turner presiding over the whole thing.

The US didn't allow Lehman to fail because some capricious Randall Flagg figure in the Treasury thought it would be fun to see what happened if they pushed the button ─ it knew that it could prop up the system enough to survive while letting the bank fail. Which ended up being a great period for everyone, but it drove home the point reasonably well.

Next year, the BoE will stress tests for wider scenarios, such as geopolitical, currency and commodities risk, incorporating the measures it's been lightly criticized for not having this time.

The right technology is, of course, critical to passing these tests, even if they are ultimately pointless. Particularly for those sprawling institutions that straddle continents, and need to have a proper view of their assets. You could argue it's staggering that they didn't before they had to, and you'd be right. But if a positive can be drawn from the exercise, it's an increase in operational efficiency and a reduction of risk across the board. After all, it's best not to rely on bailouts. Just ask Lehman.

On a final point, apologies for the delay in this week's column and alert. I was out of the newsroom on Monday and Tuesday, and thus unable to publish. The newsletter will be distributed as normal next Monday, and then break for Christmas and New Year's Eve, returning on the first Monday of 2015.