The UK banking system can continue to support the real economy through a ‘disorderly’ Brexit, the Bank of England has said.
The Financial Policy Committee published its results for the 2017 bank stress test today. While it found that the banks can handle a hard Brexit scenario, it also added: ‘It will be difficult, ahead of March 2019, for financial companies on their own to mitigate fully the risks of disruption to financial services. Timely agreement on an implementation period would reduce risks to financial stability.’
The stress test was conducted on HSBC, Lloyds Banking Group, Santander UK, Standard Chartered and Nationwide Building Society, which all passed without reservations.
Royal Bank of Scotland and Barclays however failed the test based on the amount of capital banks hold at the start of 2017. The FPC said however they do not need to raise extra capital as they increased it during the year.
This is the first that since the testing began in 2014 that no bank has been told to strengthen its capital position.
The Financial Policy Committee said that banks are three times stronger than they were 10 years ago.
It ran a scenario ‘more severe’ than the financial crisis was UK GDP falls 4.7% and the bank rate goes up to 4%, accompanied by a 33% fall in house prices. While the banks lose £50 billion in the first two years of the test, it said that they are now strong enough to keep lending.
It added that if a ‘disorderly’ Brexit happens at the same time as a several global recession and fines for financial misconduct could result in more severe conditions than in the stress test.
For banks to draw on to support the economy in a downturn, the FPC has raised the UK countercyclical capital buffer rate from 0.5% to 1%. This takes the system wide buffer to £11.4 billion.