UK Challenger Banks Stumble On Stress Tests

Stress tests haven’t been kind to so-called challenger banks in the U.K., according to a Financial Times report.

It stated that the “Bank of England has found widespread weaknesses among the UK’s challenger banks in stress tests that showed new lenders cutting corners in an aggressive pursuit of growth.” Not only that, but “a senior regulator at the central bank wrote to chief executives this week, ordering them to tighten standards and correct ‘overly optimistic’ risk modelling.”

The main problem reportedly stems from challenger banks’ failure to support “assumptions in their stress test models,” according to the news outlet. As well, those upstart financial institutions also are operating with an “aggressive focus on growth,” according to regulators, and “tend to make risker loans.”

The recent news about challenger banks — which are striving to ride the wave of payments and financial services innovation sparked by such factors as the rise of smartphones and regulatory encouragement for new products and services — follows a scandal at Metro Bank, the report noted. The financial institution had to “slash growth plans and turn to investors for a £375m emergency share issue after admitting it had misclassified loans and did not hold sufficient capital.”

The ongoing regulatory focus on challenger banks also reflects the push from authorities since the financial crisis to “break the monopoly of high street banks as part of efforts to boost competition and avoid having institutions that are “too big to fail,” according to the report. It said the stress test assumed the following conditions: “A 4.7 per cent drop in UK gross domestic product, with a 40 per cent drop in commercial property prices and a 33 per cent fall in residential property.”