Banks could support UK economy in disorderly Brexit

Britain’s lenders could support the economy through a “disorderly” Brexit, the Bank of England said Tuesday, as the sector passed its latest round of stress tests.

The central bank ruled however that the nation’s seven top retail banks must hold another £6.0 billion ($8.0 billion, 6.7 billion euros) in combined capital reserves to safeguard against crisis.

“The stress-test scenario … encompasses a wide range of UK macroeconomic risks that could be associated with Brexit,” read a statement from the BoE’s Financial Policy Committee (FPC).

“As a result, the FPC judges the UK banking system could continue to support the real economy through a disorderly Brexit.”

BoE governor Mark Carney, speaking at a press conference, warned however that such a Brexit was “in nobody’s interest” and would have “an economic impact on households and businesses”.

Carney added that a disorderly Brexit “is not a good scenario… it is one we are all working to avoid as it has some quite material economic costs — even if the financial system continues to operate through it”.

Britain will leave the European Union in March 2019 after the nation voted last year to leave the bloc, but the terms of its exit and future trade relationship are under negotiation. There are concerns a deadlock in the talks could see Britain leave without a trade deal in place, potentially causing severe disruption to its economy.

The stress assessments were designed to see whether the banking sector can weather a fierce worldwide recession, crashing house prices and soaring unemployment.

However, the BoE warned that both a chaotic Brexit and a global recession — combined with misconduct costs — could result in “more severe” economic fallout than the tests anticipate.

The FPC regulator, established after the global financial crisis and tasked with safeguarding Britain’s financial system, added it would lift its so-called capital buffer rate from 0.50 percent to 1.0 percent from November 2018.

That will give Britain’s retail lenders combined capital reserves of £11.4 billion.

The regulator added it would re-examine the adequacy of the buffer rate in light of its findings.

“The combination of a disorderly Brexit and a severe global recession and stressed misconduct costs could result in more severe conditions than in the stress test,” the FPC said in its Financial Stability Report.

“In such circumstances, capital buffers would be drawn down substantially more than in the stress test and, as a result, banks would be more likely to restrict lending to the real economy.”

‘Resilient to recession’
The Bank of England added Tuesday that all seven lenders passed its stress assessments for the first time since it began testing in 2014, and are “resilient” to recession.

Barclays and Royal Bank of Scotland struggled in the central bank’s severe economic stress scenario.

However, the pair passed the latest tests as they have already taken action to strengthen their balance sheets since the end of last year.

RBS had been the only bank to fail the last tests in November 2016.

“For the first time since the Bank of England launched its stress tests in 2014, no bank needs to strengthen its capital position as a result of the stress test,” the BoE added Tuesday.

“The 2017 stress test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs.”