LONDON: UK banks are strong enough to survive a disorderly Brexit that could leave the country worse off than the 2008 financial crisis, according to the Bank of England.
For a second straight year, none of the high street lenders have been told to raise billions of pounds in capital to strengthen their finances, under the Bank’s latest financial sector health check.
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.
Lenders faced the same crisis scenario during last year’s stress test, but the Bank of England said the economic shocks and market turmoil modelled in the tests broadly matched its assessment of the effects of a no deal, no transition Brexit, which was detailed in a separate paper released by the central bank.
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”.
Bank of England governor Mark Carney said the tests should provide assurance that the financial system is ready for the worst effects of an EU divorce.
“There are lots of issues that people I’m sure are thinking about, are concerned about or have questions about. One area they shouldn’t have questions about is the financial system, and the purpose of what we released … the no deal, no transition, disorderly scenario, is to arrive at reassurance.
“It’s not supposed to make people scared, it’s meant to provide reassurance that even if this happened, which is not likely, the system is more than ready for it,” the governor said.
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 stress tests were first conducted in 2014.
RBS, which is 62% owned by the taxpayer following its £45bn bailout at the height of the 2008 financial crash, welcomed the results.
The bank’s interim chief financial officer Katie Murray said it “provides confidence that RBS could continue to support its customers and the UK economy, even in the very tough economic conditions modelled in the test,” she said.
“It is a sign of further progress in rebuilding capital in a year when we also resolved our last major legacy issues as well as announcing an annual profit and paying a dividend for the first time in ten years.”
In its financial stability report, which is a half-yearly update on risks to the financial system and was also published, the Bank said that apart from the risks related to Brexit, “domestic risks remain at a standard level overall”. It said risk appetite among banks was strong, though demand for borrowing was slightly muted due to uncertainty stemming from the EU divorce.
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.