Stress tests show UK banks ‘prepared and strong enough’ to weather disorderly Brexit – BoE
The report also said: “UK banks are prepared and strong enough to continue to serve UK households and businesses even through a disorderly Brexit.”
The stress test scenario included UK GDP falls of 4.7%, an unemployment rate of 9.5% and residential property price falls of 33% and 40% for commercial. It also includes a sudden loss of investor appetite for UK assets, a 27% fall in Sterling exchange rate index and Bank Base Rates of 4%, a far more extreme scenario than 2008/9.
The report said the work all major UK banks have done on strengthening capital positions mean Tier 1 capital ratios are three times higher than before the credit crunch.
The 2018 stress test is the first to be conducted under a new accounting standard, International Financial Reporting Standard 9 (IFRS 9).
Since the EU referendum in 2016, the FPC and other authorities have identified risks of disruption to the financial system and the regulator has reviewed a disorderly Brexit scenario, with no deal and no transition period, that leads to a severe economic shock.
Based on a comparison of this scenario with the stress test, the FPC judges that the UK banking system is strong enough to continue to serve UK households and businesses.
The ‘worst case’ scenario of a cliff-edge Brexit included the sudden imposition of trade barriers with the EU; loss of existing trade agreements with other countries; severe customs disruption; a sharp increase in the risk premium on UK assets; and negative spill overs to wider UK financial markets.
On funding, the central bank also judged the major UK banks have ‘sufficient liquidity to withstand a major market disruption.’
It said: “Since the financial crisis, major UK banks have substantially reduced their reliance on wholesale funding. At group level, they hold more than £1trn of high-quality liquid assets. They are able to withstand more than three months of stress in wholesale funding markets.
“As a result of supervisory actions and their own prudent risk management, major banks have aligned the currency of their liquid assets to that of their maturing wholesale funding. They can now withstand many months without access to foreign exchange markets.
“In addition, banks have pre-positioned collateral at the Bank of England that would allow them to borrow a further £300bn.”
The bank has also played down the risk of leveraged lending to businesses as UK bank’s holdings and aggregate exposures are ‘very small.’