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UK banks pass stress test and could handle 'disorderly' Brexit, says Bank of England - live!
UK banks pass stress test and could handle 'disorderly' Brexit, says Bank of England - live!
(35 minutes later)
The BoE’s Financial Policy Committee, set up to assess risks to the financial system, had judged that:
Q: Are overseas investors already losing faith in the UK?
The UK banking system could continue to support the real economy through a disorderly Brexit.
The UK has tremendous strengths, Mark Carney replies. But you need a strong “bedrock” to encourage investors to keep putting money into Britain.
However the combination of a disorderly Brexit and a severe global recession and stressed misconduct costs could result in more severe conditions than in the stress test,” the Bank said.
Q: Why do you think a disorderly Brexit would be unlikely?
Threadneedle Street confirmed that banks would be required to hold an extra £11.4bn in capital by next November, but will now review whether they will need to build an additional cushion in the future in light of the potential risks in the system.
Mark Carney says there were several reasons.
Mark Carney, governor of the Bank of England, said:
That includes the fact that all parties are working towards an agreement, and have said it would be in the best interests of both sides.
The FPC is taking action to ensure the financial system is resilient to a very broad range of risks so that the people of the United Kingdom can move forward with confidence that they can access the financial services they will need to seize the opportunities ahead”.
Governor Carney also warns that individual banks can’t resolve the huge number of derivative contracts between the UK and other EU countries (totalling some £20 trillion)
The seven main lenders lose £50bn during the stress tests which considered fall in GDP, collapse in the pound and record drop in house prices
We need secondary legislation to guarantee contract continuity - both in the UK and the EU - he adds.
Here’s the official confirmation that Britain’s banks have enough capital to withstand a new financial crisis.
Onto questions...and straight into Brexit.
We’ve published the results of our 2017 stress test. https://t.co/R5POyRlSCp pic.twitter.com/XwyVKQHzFI
Q: How long does a Brexit transition period need to be, and how soon to we need it?
Importantly, the Bank of England has also found that Britain’s banks could cope with a “disorderly” Brexit without having to curb lending or be bailed out by taxpayers.
Carney says the minimum transition period is 18 to 24 months, and it needs to be agreed “the sooner the better”.
High street lenders can withstand a disorderly Brexit according to the Bank of England even though RBS and Barclays struggled in latest health check on the banking sector
The Bank of England also tested how UK banks would cope with the disruptive impact of Fintech.
@bankofengland says can't say what disorderly Brexit would look like, but banks could withstand it anyway. The assumption is wouldn't be worse than Bank's stress tests: 4.7% fall in unemployment, 9.5% unemployment etc. Cold comfort.
The banks themselves say they are well-positioned to cope.
Here we go!
But the BoE reckons that new technology could have “profound consequences” on incumbent banks.
Britain’s seven largest lenders have passed the tough stress test posed by the Bank of England.
They include:
This is the first clean slate since the tests were created in 2014, and suggests the sector is in relatively decent shape to survive the next recession.
A rise in the cost of recruiting customers, which could hit market share
BUT! Barclays and Royal Bank of Scotland only passed because they have raised fresh capital during the course of 2017.
A rise in the cost of raising equity - which is bad for profitability.
More to follow!
On Brexit, Mark Carney says the Bank of England focused on the scenarios that would have the biggest impact on UK stability, even if they are unlikely.
BofE Stress Tests “all 7 participating banks have sufficient capital to pass tests”
And....the Financial Policy Committee judged that UK banks could continue to support the UK economy, even in the event of a disorderly exit from the EU.
BoE confirms no #bank needs to raise capital following #stresstest ...clear run now for #dividends ?!
But.... Carney adds that banks would struggle to cope with a hard Brexit AND a global recession at the same time.
Today’s stress tests model the “doomsday” scenario for Britain’s banks, says Business Insider’s Will Martin.
If a series of “highly unfortunate events happened simultaneously”, capital reserves would be run down and banks would restrict lending to the real economy, the governor adds.
And here it is:
Mark Carney: The £50bn of losses in these stress tests would have wiped out all bank capital 10 years ago
In the UK economy, the BoE modelled the effects of a sharp recession of more than -4% GDP. This is accompanied by the pound collapsing to just $0.85, a fall of about a third from current values.
Carney - for first time all big banks pass stress tests which include 33% fall in house prices and doubling of unemployment.
Global growth is also hit, with banks tested on how they would cope with a worldwide contraction of 2.4%. This scenario also includes a collapse in Chinese commercial real estate of more than 40%.
BoE governor Mark Carney says that Britain’s banks are “well-placed to provide credit to households and businesses” even if they suffered recessions in the UK and abroad, large asset price falls, and hefty fines for misconduct.
As a result, unemployment in the UK climbs higher than during the financial crisis.
[reminder: here’s what the tests covered]
Commercial lending collapses, leading to disaster in the property market. House prices fall by 33% and commercial real estate loses 40% of its value.
Carney confirms that that banks would lose £50bn in the first two years of the scenario - enough to wipe them out 10 years ago. This time round, he says, they are strong enough to cope.
The Daily Telegraph’s Iain Withers compares today’s stress tests to classic computer game Sim City.....
Bank of England governor Mark Carney is facing Britain’s (bleary eyed) banking reporters*, to discuss the stress test results.
He writes:
You can watch it live here:
Fans of the blockbuster Nineties PC title SimCity 2000 will remember it as a fiendishly addictive city management game. Players built roads, homes, offices, shops, factories and utilities in what proved a surprisingly popular simulation of life as a city mayor.
* - they’ve been locked in the Bank since 5am
Sometimes the game would suddenly trash your city with an alien invasion, to test your mettle. A massive black metal spider-like creature would pop up on the screen and start razing parts of your lovingly crafted metropolis with laser beams. There was little you could do other than hunker down, wait for the alien to leave, put out the fires and rebuild.
Lloyds has issued a statement, confirming that it has passed today’s stress test.
I fear today’s test may not be quite as much fun, though
Barclays has also put out a statement, which points out that its results were dragged down by the possibility of fines from banking regulators for misconduct.
Good morning. We’re about to discover if Britain’s banking sector is strong enough to survive a new financial crisis.Bank of England has put the UK’s seven biggest lenders through a series of rigorous tests to see how they’d cope if the economy hit the rocks.The BoE’s stress tests model a serious financial downturn, at home and abroad.
An element of the 5.0% drawdown in the BoE’s 2017 stress test reflects litigation and conduct issues which Barclays is aiming to resolve.
They examine if banks have enough capital to handle a sharp fall in UK and global growth, a surge in consumer bad debts, a plunge in the pound, and a jump in unemployment caused by higher interest rates. It will also test their long-term financial resilience.
Barclays continues to target an end state CET1 ratio of around 13%, although it may temporarily run above that level until these legacy issues are resolved.
The seven lenders are Barclays, Royal Bank of Scotland, Lloyds, HSBC, Standard Chartered, Santander’s UK operations, and the Nationwide building society.
Standard Chartered says that it ‘notes’ it has passed today’s stress tests, adding;
The results are released at 7am GMT, and will show which banks are best, and least, prepared for the next recession.
The Group has a strong and liquid balance sheet and these results demonstrate the benefits of the actions recently undertaken by the Group to improve its resilience to an extreme stress scenario.
Banks whose exam paper comes back covered in red ink will face tough questions about their resilience. Any lender who actually fails the test forced to sell off assets or ask existing shareholders and bondholders for more cash.
Last year Royal Bank of Scotland fell short, so it’ll be under particular scrutiny this year. A poor performance could undermine the UK government’s attempt to sell its majority stake in RBS.
We already know that the lenders will suffer £30bn of losses on consumer loans under the tests. Today’s results will show where those losses are concentrated.
Adding to the fun, the Bank of England is also releasing its latest Financial Stability Report this morning. That will show the BoE’s view of the UK financial system, and the key threats to financial stability.
Our City editor Jill Treanor is locked in the Bank of England, reading the stress test now ahead of 7am. Here’s her preview:
Here’s the agenda
7am GMT: UK bank stress tests released
7.30am GMT: Bank of England governor Mark Carney holds a press conference. He’ll discuss the stress test results and the BoE’s financial stability report
10am GMT: OECD releases its latest economic outlook
1.30pm GMT: US trade balance for October
2.45pm GMT: Federal reserve chair nominee Jay Powell’s confirmation hearing at the US Senate
