The UK’s banks could cope if Britain leaves the European Union in a “disorderly Brexit” in 2019, the Bank of England has announced.
“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” says the report
“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.”
In an absolute worst case scenario the Bank of England’s stress tests calculated the results on a massive 33% fall in house prices, a rise in interest rates from 0.5% to 4% within two years, and the unemployment rate rising to 9.5% from its current rate of 4.3%.
Commenting on the tests, David Strachan, partner and EMEA head of the Centre for Regulatory Strategy at Deloitte, said: “The results of the exploratory scenario demonstrate a significant reduction in return on equity against plans, but even then embed aggressive assumptions around cost reduction. Therefore taking cost to income ratios from 68% to 54%. Cost reduction is already on banks’ agendas and they would likely need to find structurally different approaches to achieve the projected savings.
“The results mention the quality of stress testing, and specifically the progress banks still need to make on models and data. Perhaps more important though is that stress testing processes in general remain laborious and distinct from day-to-day operations. Banks will not be able to embed the exercise in their regular operations until processes are improved.
“The FPC plans to reconsider the adequacy of a 1% countercyclical capital buffer rate in light of the evolution of the risk environment, included because of Brexit. I expect banks to be asked to perform sensitivity analysis around certain scenarios – for which banks could of course use their stress testing capabilities. Such scenarios are unlikely to be formally part of the 2018 scenario though.”