Big banks’ lending should hold up in ‘disorderly’ Brexit

● BOE reassurance comes as seven main institutions all pass latest ‘stress tests’

Britain’s biggest banks could withstand a “disorderly” Brexit and still keep lending to the real economy, the Bank of England has said, but warned of the risks of a cliff-edge exit from the European Union.

The comments by BOE governor Mark Carney yesterday came as the results of this year’s balance sheet “stress tests” of major lenders showed none of them needed to bolster their capital buffers further – although Royal Bank of Scotland and Barclays struggled to get over the line.

RBS and Barclays relied on capital raised this year to pass the tests rather than in 2016 as normally required for getting a pass mark in the “stress” scenarios that take in recession, substantial rises in unemployment and base rates, and sharp housing and stock market falls.

It is the first time since the tests were launched in 2014 that all banks have passed the capital tests, RBS falling short this time last year. Other successful banks this time were HSBC, Lloyds, Nationwide, Santander and Asian-centric Standard Chartered.

Carney said at a press conference accompanying the Boe’s half-yearly Financial Stability Report: “The [BOE] … judges that the banking system can continue the real economy, even in the unlikely event of a disorderly Brexit.”

However, the governor warned: “In the event of a sharp disorderly Brexit, there will be an economic impact on households, on businesses. There will be lost markets before new markets are found, and there will be some pain associated with that.”

Furthermore, if a disorderly Brexit were to occur simultaneously with a global recession and more big misconduct fines for banks it was unclear how well the banking system could cope, he added.

Carney also stressed that a Brexit transition period of at least 18 to 24 months would be required to help maintain financial stability.

He said: “We have said from the outset that, for financial institutions, a transition period of between 18 to 24 months would be the minimum necessary.”

Laurent Frings, head of credit research at Aberdeen Standard Investments, said: “Any Brexit-related slowdown in consumder spending is a big potential headache for the banks. Investors need to be mindful of how much comfort they take from the [stress] tests.”

British banks have been forced by regulators to triple the capital they hold to back their loan books since financial markets froze up in 2007 ahead of the sector crisis and general recession of 2008-09.

Ewen Stevenson, chief financial officer of RBS, which is still 71 per cent owned by the taxpayer, said: “We continue to make progress towards the stress-resilient bank we aspire to be.”

But he added: “Until we have resolved our remaining major legacy conduct issues and non-core portfolio interests, we will continue to show stress test results weaker than our long-term targets.”