UK banks can survive a disorderly Brexit, says Bank of England

Mark Carney

UK banks are strong enough to survive a disorderly Brexit and the worst-case scenario of a credit crunch-style economic shock, according to the Bank of England’s latest sector health check.

Related: Bank: no-deal Brexit will be worse than the financial crisis - business live

For a second straight year, no high street lender has been forced to raise billions of pounds in capital to strengthen its finances.

Seven lenders – RBS, Barclays, HSBC, Lloyds, Standard Chartered, the UK arm of Santander and Nationwide building society – were tested against a crisis scenario involving a 4.7% fall in UK GDP, a rise in unemployment to 9.5%, a 33% drop in house prices, a hike in interest rates to 4% and a 27% drop in the value of the pound.

The test encompassed conditions more severe than the 2008 global financial crisis. The Bank said the results showed the UK banking system was “resilient to deep simultaneous recessions in the UK and global economies” alongside large falls in asset prices and the additional stress of misconduct costs. It deemed the sector “strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit”.

The clean health check comes despite a relatively poor showing by UK banks in recent EU stress tests, with Barclays and Lloyds some of the worst performers among 48 European lenders when tested against hypothetical shocks including a disorderly Brexit, a government bond sell-off and a drop in economic growth.

While Barclays and Lloyds came close to failing the Bank’s latest stress tests based on their core capital levels – a key measure of a bank’s underlying financial strength – some of the banks’ assets would be converted into equity under a crisis scenario, giving them more breathing space.

Last year the spotlight fell on RBS and Barclays, both of which struggled through the stress tests but were able to squeeze by without being forced to raise billions of pounds in extra capital. The annual stress tests were first conducted in 2014.

In its financial stability report, which is a half-yearly update on risks to the financial system, the Bank said that apart from the risks related to Brexit, “domestic risks remain at a standard level overall”. It explained that risk appetite among banks was strong, though demand for borrowing was slightly muted due to uncertainty stemming from the EU divorce.

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But the report highlighted potential contagion from Italy, where a new government has been at loggerheads with EU officials over spending plans, causing jitters across financial markets. “A further deterioration in Italy’s financial outlook could result in material spillovers to the euro area and the UK,” the Bank said.

The publication of the stress tests, financial stability report and the Bank’s Brexit assessment were brought forward from December to meet demands by MPs on the Treasury select committee for a full Brexit analysis before the parliamentary vote on Theresa May’s withdrawal deal on 11 December.

Powered by Guardian.co.ukThis article was written by Kalyeena Makortoff Banking correspondent, for theguardian.com on Wednesday 28th November 2018 17.16 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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