Carney to test UK banks on Brexit stress
THE UK’s biggest banks will be tested for survival against a nightmare Brexit scenario of a pound plunging against the dollar, a deep recession and runaway inflation, the Bank of England said today.
The central bank’s latest scenario comes two days before Prime Minister Theresa May formally triggers Article 50 negotiations and puts the nation on a path to leaving the European Union by March 2019. The latest battle planning by the BoE will test how banks can weather a dramatic 32% slump in the pound to just 85 cents against the dollar, as well as inflation rocketing to 5% — almost double official predictions — by the end of 2018. Banks must also plan for a deep UK re c e s s i o n , wh e re o u t p u t slumps 4.7% and the Bank, led by Governor Mark Carney (pictured), hikes interest rates to 4%.
Seven UK lenders — Barclays, HSBC, Lloyds Banking Group, Nationwide, RBS, Santander and Standard Chartered — are included in the tests, whose results will be published in November. The group account for about 80% of the outstanding stock of lending.
Although Brexit is not explicitly mentioned in the tests, the BoE says the scenario plays through a slump in demand for UK assets and soaring funding costs for borrowers in the real economy, as well as “a sudden increase in the rate of return investors demand for holding sterling assets and an associated fall in sterling”. The BoE is also asking UK banks to weather a deeper recession for the global economy — with growth shrinking by 2.4% — as Chinese credit markets collapse.
Alongside the nightmare scenario of the Brexit collapse in the pound, Threadneedle Street is also asking banks to test against a longer-term scenario of lower profits over seven years. This will test the resilience of the banking system to “if recent headwinds to profitability persist and intensify”. This includes weak global grow th, persi stently low interest rates, falling world trade and cross-border banking activity as well as inc reased competitive pressure on large UK banks from challengers and fines for bad behaviour. Alongside the details of the stress tests the minutes of the Bank’s latest Financial Policy Committee meeting warned that “risks remain elevated”, and flagged up rising debt in China and “vulnerable” eurozone countries.
It added that there were “a range of possible outcomes” over Brexit talks although the FPC is overseeing contingency plans to mitigate risks to financial stability as negotiations unfold.
“Sudden adjustment could disrupt the provision of market liquidity and investment banking services, particularly to the EU real economy, which could spill back to the UK economy,” the minutes warned.
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