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Stress test, can you pass it? #finance

The Bank of England has set a stress test for Britain’s banks and advised that capital requirements should be sufficient to meet a crisis such as the one outlined. We too should ask if we can survive such a crisis or would we become bankrupt, lose our home or be unable to meet our obligations. How bad could things get?

stress test

The stress test

“This year’s stress scenario for the UK combines rapidly rising interest rates and unemployment in conjunction with significant falls in property prices and GDP.  In particular base rates rise to 4 per cent in the first year and remain at this level for a further 3 years, GDP falls 4.7 per cent in the first year, unemployment increases to a peak of 9.5 per cent in the second year, and UK house and commercial property prices fall 33 per cent and 40 per cent respectively over the first three years. In addition, the pound depreciates significantly against the dollar with a 32 per cent fall in the first year.”

Capital

So there are a few things to consider, first of all, rising interest rates would mean bigger mortgage repayments. Then there is unemployment to consider, could you survive if you were made redundant? Then there are the property prices that would mean negative equity for many new owners of property. There is also inflation to consider as the value of the pound plunges. Would you have enough capital to survive such a scenario?

Brexit

Brexit was forecast by the Bank of England to cause such a crisis but it didn’t happen. Could such a crisis be triggered by failure to come to an agreement on Brexit with the European Union? It is still a wise move by the Bank of England to ensure that banks do have that capital buffer to survive without government intervention should we go into another crisis like in 2007.

This week

I think I would survive such a crisis but it wouldn’t be pleasant! This week, I have made progress with my investments. Immupharma went from 98.75 last Friday to 126 yesterday which was a huge rise following on from recent rises. It was only 46 in August. I paid 51 so it is great for me. Immupharma’s share price is very volatile so there are still opportunities to buy on the dips. The other riser this week was Tesco, which went up 5 and puts it in a good position for me to sell. I do want to reduce my exposure to the stock market because I think Brexit is still a risk and should there be a substantial crash and share prices fall, I want some cash so I can profit from the panic. The other news this week was that Graphene Nanochem is suspended while they negotiate a reverse takeover. I think that company needs a miracle so it isn’t worth selling now. I might as well hang on and hope for that miracle. Overall the value of my portfolio has increased over 3% this week and it is up over 10% from August when things were looking pretty dire. The lesson to be learned there is to just sit tight when things look bad and look for opportunities. If I needed to, I could sell half my portfolio and leave all the loss makers until such time that they recover which would give me a lot of cash to invest if there was another crisis.

Stress tests for all companies?

It would seem evident that we need to apply stress tests to our personal finances to see if we could survive a crisis but so do many companies besides the banks. A regular stress test analysis at Carillion would have avoided their problems and I’m sure Carillion would find it very difficult to survive a financial crisis today. The same can be said of many other companies including   FTSE 100 companies like ITV. They all need bigger capital buffers and they need more easy access to investment so they don’t have to leverage the business so much using the banks who can panic when there is a crisis. Someone said that Lloyd’s may have a problem because it lent to Carillion but I haven’t confirmed that. Finally, I am watching Verona Pharma with interest because that could soar just like Immupharma at any time. There have been positive noises from brokers and pundits about Premier Foods recently too. I hope their Christmas advertising campaign goes well.

That’s all for this week. If you would like to follow my blog just enter your email address at the top of the sidebar or follow me on Twitter for updates. You can also find links on my Facebook page.  We have Gareth Gates switching on our Christmas lights in Wednesbury later so I’ll be out in the freezing cold photographing that event. That will be a real stress test!

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