The Debt Connection – December 2015

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In the latest Debt Advisory newsletter from Clearwater International, we ask if the banking crisis era is over for the UK?

The news release from the Bank of England (BOE) earlier this week certainly seems to say it is. These comments came as part of the release of the latest biannual Financial Stability Report and round of bank stress tests.

The reports and comments provide a clear sign that UK banks have made significant strides in reorganising their operations and balance sheets, to the point that they now stand in a much stronger position and are more able to deal with domestic and international shocks to the financial system.

Clearwater International has seen an increased level of competition in the mid-market between banks and a rise in appetite to do more deals across a wider range of transactions, with increased leverage and keener pricing. With capital requirements for the UK’s biggest banks now 10 times those at the time of the financial crisis, their confidence could indicate that they are beyond the crisis era and willing to support mid-market businesses.

In contrast, SMEs have seen reductions in funding available from the banks, with 30% of small businesses having their overdraft either reduced or cancelled in the last two years. Clearly an indication that smaller businesses have been disproportionally affected by UK banks focusing on larger underlying clients, due to higher capital requirements for lending to smaller businesses. However, the entrance of many new alternative lenders – such as Asset Based Lenders, direct debt funds and peer-to-peer lending platforms – means that there are a number of new options available. With banks now apparently being in a more stable position, it will be interesting to see if SMEs benefit from increased credit availability.

The Financial Stability Report provides a view of the current stability of the UK financial system: an assessment of its strengths and weaknesses, and a view on the outlook going forward. Alongside the Financial Stability Report, there was publication of the latest stress tests on the UK’s biggest banks and building society which resulted in most of the banks seeing their share prices rise soon afterwards.

None of the banks failed the stress test this time, although Royal Bank of Scotland and Standard Chartered were flagged for having capital inadequacies. The BOE said neither of the lenders would have had enough reserves to withstand the stress scenario in which Chinese growth slowed to 1.7%, oil prices fell to a low of $38 per barrel, volatility in financial markets spiked and the dollar appreciated against a wide range of currencies. The silver lining to this cloud is that both lenders had already taken steps to boost their capital buffers in recent months and were therefore not required to submit new plans to the regulator.

The fact that none of the banks needed to raise additional capital as a result of the stress tests led to bank share prices rising. Another reason for the positive reaction was a comment from BOE Governor Mark Carney, who stated the banks are most of the way towards reaching their capital reserve targets for 2019.

All this largely positive news means the funding market in the UK – of which the banks still make up the significant majority – is in a much more stable position and should be more willing and able to support businesses, along with the wider economy.