Spotlight: British banks equipped to withstand "disorderly Brexit" -- Bank of England

Source: Xinhua| 2017-11-29 15:51:47|Editor: liuxin
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LONDON, Nov. 28 (Xinhua) -- British banks are ready to bear the worst instability that an unsatisfactory Brexit could deliver, according to the annual Financial Stability Report (FSR) of the Bank of England (BoE) published Tuesday.

The BoE, the central bank of Britain, subjects the seven major British banks to annual stress tests, a custom first introduced in 2014. The seven banks are Barclays, HSBC, Lloyds Banking Group, Nationwide, The Royal Bank of Scotland Group (RBS), Santander UK Group Holdings and Standard Chartered, all with a substantial British and international presence.

The stress test scenario provided a harsher set of economic and financial conditions than last year's, which the banks said was worse than the financial crisis.

The test by BoE's Financial Policy Committee (FPC) modeled a 2.4-percent fall in world GDP, a 4.7-percent fall in British GDP, a 33-percent drop in British property prices, a 4.7-percentage-point increase in unemployment, and a 350-basis-point rise in the bank rate.

"In our judgment, banks are now resilient to the risks of a disorderly Brexit," said Mark Carney, BoE governor. "The question is: what if something else were to happen at the same time?"

The BoE said the tests had found the banking system could absorb 50 billion pounds (66 billion U.S. dollars) of losses in Britain and also 40 billion U.S. dollars in overseas assets in the next few years.

The banks could also withstand a further 40-billion-pound (52.8 billion dollar) loss arising from misconduct costs and fines by regulatory authorities.

"The biggest threat is that the banking system faces a cocktail of risks at the same time; a global recession, a disorderly Brexit and a surge in misconduct fines," Paul Hollingsworth, British economist at Capital Economics, a London-based financial data analysis firm, told Xinhua.

"The FPC noted that this would result in tougher financial conditions relative to the stress scenario, and would constrict bank lending," the economist said.

The FPC thought that Britain is now in a "standard" risk environment and subsequently, pressed ahead with increasing the counter-cyclical capital buffer from 0.5 percent to 1 percent, effective from November next year.

"Given that this has already been signalled, and the strengthening in capital positions that has already taken place, this should not provide a threat to bank lending, or prevent the FPC from tightening monetary policy, over the next few years," Hollingsworth said.

In 2016, two banks, Barclays and RBS, failed the tests which showed that both would not have the capital levels required to pass the test. But the BoE assessed that since then both had improved their capital positions.

The FPC remained concerned about the rapid growth in consumer credit, which in a downturn could generate a disproportionate amount of losses, the vulnerability posed by Britain's large current account deficit, and some asset valuations, including London commercial property and some sterling corporate bonds.


Linked to the FSR is the BoE's Systemic Risk Survey (SRS), a twice-yearly survey of financial markets practitioners, examining the potential pitfalls over the coming years and gauging the confidence of banks in the stability of the British financial system. It is published at the same time as the FSR.

The survey found practitioners' confidence had increased, saying that the probability of a high-impact event in the British financial system in the short and medium term had "fallen modestly".

Confidence in the stability of the financial system over the next three years had increased, with the proportion of respondents judging themselves to be very confident or completely confident increasing slightly.

The greatest perceived risk was political, mentioned by 91 percent of respondents, up 9 percentage points since the last survey. Ninety percent of respondents that cited British political risk explicitly referred to the implications of the Brexit vote.

The FSR noted that the risk of a disorderly Brexit was unlikely but Governor Carney warned that if a disorderly Brexit did take place "there will be pain associated with that".