HSBC & Standard Chartered are most vulnerable UK banks to 'China stress test'

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The Bank of England (BoE) is poised to unveil the strength of Britain's largest lenders and HSBC and Standard Chartered are the most at risk of failure due to an exposure to Chinese credit, according to analysts from RBC Capital Markets.

BoE to focus on 'Chinese credit'

BoE officials have played out three rounds of stress testing to date and gauged the seven major U.K. banks' performance with the results due to be released on Wednesday.

The first testing round simulated a collapse in U.K. housing prices while the second round replicated a recession in China alongside a property crash in Hong Kong.

"The market is concerned with Barclays on the stress test it seems, but the planned management actions and the dynamic nature of the U.K stress test we expect puts Barclays in a better position than HSBC and Standard Chartered with the BoE's focus on Chinese credit," RBC Capital Markets analysts wrote in a November 14 note.

Regulatory action

In contrast, Autonomous Research LLP predicted that Barclays and Royal Bank of Scotland (RBS) are most likely to be the weakest performers. The pair are even forecast to have failed, albeit marginally, according to media reports.

Any such failure, however marginal, would represent a significant blow for two of Britain's largest banks although the BoE stress test is focused on the finances of the lenders at the end of 2015. Since then Barclays and RBS have managed to improve their capital.

Autonomous Research argued that it would therefore not be necessary for regulatory action to be taken.

Public trust

The annual health check of Britain's biggest banks has been adjusted from previous years to ensure more severity in its testing process.

"Under (the new) framework, the stress being tested against will generally be severe and broad, in order to assess the resilience of major UK banks to 'tail-risk' events," the BoE said in March.

In the new regulations from the BoE, every bank must now exceed its own respective hurdle rate as well as a new threshold called the Systemic Reference Point (SRP).

The SRP includes global risks and analysts from RBC Capital Markets argued that HSBC and Standard Chartered are the most vulnerable U.K. based banks to the second stress test which simulated an economic downturn in China.

Stress testing for banks had been introduced as a result of the financial crisis in 2008 in an attempt to restore public trust in the financial system.

The banks being tested by the BoE are, Barclays, RBS, HSBC, Lloyds Banking Group, Standard Chartered, the UK arm of Santander and building society, Nationwide.