UK Banks have been put through their latest annual ‘stress test’. This is the annual ‘health check’ by the Bank of England. The result is that none, for the first time, have been required to strengthen their balance sheets.
The model used by the Bank of England to come to its conclusions was asking ‘how would the financial system be affected by an economic shock worse than that of the financial crisis of 2008.’
The seven biggest lenders, Lloyds, Nationwide, HSBC, Standard Chartered and Santander passed comfortably with Barclays and RBS doing so by the narrowest of margins.
The Bank of England’s ‘Armageddon scenario” included a slide in the pound, a housing market collapse worse than any in history, severe recession, soaring unemployment and a global economic slump. They concluded that the stress tests showed that as well as our banks being robust they would all continue to lend to businesses and households through even the most disastrous Brexit scenarios. This does not mean that a hard Brexit would not have devastating economic outcomes, just that the Banks would not be part of the problem.
As the negotiations for Brexit continue between the EU and the UK government there is an awareness that there are hundreds of different potential outcomes. There is hope that common sense will prevail. The concern for many is that it won’t.
The fear is that the UK and the EU do not come to a sensible agreement and in the worst case if the UK were to suddenly crash out of the EU with a ‘no deal’ scenario and no period of transition, the risk would be high that the payments system would freeze and markets would descend into chaos.
It is the Bank’s understanding that our Banks are strong enough to survive such an outcome. The hope for the Bank of England is that a speedy agreement will be forthcoming, addressing the potential disruption Brexit could cause. In particular it flagged up the potential upheaval in the insurance and derivatives markets.
The Brexit negotiations flag up risks for both sides.
Legislation is needed to preserve continuity of cross-border insurance. Without this, 6 million policy holders in the UK and 30 million in the EU will find themselves in a position where their provider will no longer have the right to collect premiums nor to pay out claims.
The nominal value of derivative contracts stands at £26 trillion and their future validity would also be in doubt. 90% of interest rate swaps are currently cleared in London.
Without a transition period, the Bank believes that companies on both sides of the Channel simply wouldn’t have the time to make alternative arrangements even if they were prepared to pay the increased costs this would entail.