This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at https://www.theguardian.com/business/live/2017/nov/28/bank-of-england-stress-tests-financial-stability-released-live

The article has changed 15 times. There is an RSS feed of changes available.

Version 2 Version 3
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)
Q: Are overseas investors already losing faith in the UK? Q: Are UK banks being too complacent about the impact of Fintech, by assuming they can cut costs while maintaining market share?
The UK has tremendous strengths, Mark Carney replies. But you need a strong “bedrock” to encourage investors to keep putting money into Britain. That’s the challenge, Carney replies.
Q: Why do you think a disorderly Brexit would be unlikely? UK banks are assuming that they can use new technology to bring down the cost of acquiring new customers.
Mark Carney says there were several reasons. From next year, it will be easier for customers to shift accounts. And that could mean that some banks become less “front-facing”, as new challengers reshape the industry.
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 City has taken the stress test results in its stride. Shares in HSBC and RBS are up a little, while Barclays and Lloyds have dipped.
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) UK banks fairly muted reaction to stress test results $RBS $BARC $LLOY #banks pic.twitter.com/TZII3vVncX
We need secondary legislation to guarantee contract continuity - both in the UK and the EU - he adds. Mary Carney is reiterating that UK banks could handle a hard Brexit -- but there could be trouble if they also faced a wider downturn.
Onto questions...and straight into Brexit. Banks are resilient to a disorderly Brexit, the question is what if something else happens at the same time says BoE's Mark Carney
Q: How long does a Brexit transition period need to be, and how soon to we need it? *CARNEY: DISORDERLY BREXIT WOULD RESULT IN LOWER STERLING & WEAKER ECONOMY
Carney says the minimum transition period is 18 to 24 months, and it needs to be agreed “the sooner the better”. Q: Are you concerned about the state of the UK mortgage market today?
The Bank of England also tested how UK banks would cope with the disruptive impact of Fintech. Mark Carney says the FPC have put several restrictions in place in recent years, to precent lenders from making unduly risky loans. Those measures seem to be working.
The banks themselves say they are well-positioned to cope. Today’s stress tests also found that buy-to-let mortgages would suffer the bulk of the losses if there was a financial crisis.
But the BoE reckons that new technology could have “profound consequences” on incumbent banks. Loans to owner-occupiers would be much more modest.
They include: In other words, families would keep paying off their mortgages even if the economy went into recession, but some buy-to-let lenders might struggle to meet their obligations.
A rise in the cost of recruiting customers, which could hit market share Carney - The losses on buy to let mortgages are 4 times the losses on owner occupier mortgages under bank stress tests of rate rise from 0.5% to 4%
A rise in the cost of raising equity - which is bad for profitability. Q: Who will bear the biggest burden from a disorderly Brexit, UK households or the banks?
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. We hope that the banks bear the burden, Carney grins. That’s why they have capital reserves, to cope with tough times.
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. The governor says:
But.... Carney adds that banks would struggle to cope with a hard Brexit AND a global recession at the same time. What we want...is that people who could get mortgages prior to that event can still get mortgages. If you’ve got a good business ides you can still get funding post-Brexit.
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. But at disorderly Brexit would still have an ‘economic impact’ on households and businesses.
Mark Carney: The £50bn of losses in these stress tests would have wiped out all bank capital 10 years ago “There will be some pain associated with that”, Carney concludes; the Bank’s job is to dampen that pain.
Carney - for first time all big banks pass stress tests which include 33% fall in house prices and doubling of unemployment. Carney: a sharp, disorderly Brexit would lead to an "economic impact on households and businesses. There would be some pain associated with that, this is about dampening that" @bankofengland
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. Q: Do regulators on the continent understand the dangers of a disorderly Brexit to the EU?
[reminder: here’s what the tests covered] Carney says there is an “increased appreciation” of these issues on the continent, and the Bank is in regular contact with EU officials about these issues.
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. He singles out the risks of cross-border insurance and derivatives contracts -- these issues can be fixed, but they take time, he says sternly.
Bank of England governor Mark Carney is facing Britain’s (bleary eyed) banking reporters*, to discuss the stress test results. The BBC’s Simon Jack nails it:
You can watch it live here: Carney - Disorderly Brexit is something we are all working to avoid because there will be significant disruption - but won't be worse than the economic stresses we have put in the tests ie 33% fall in house prices and doubling of unemployment. Not very comforting.
* - they’ve been locked in the Bank since 5am Q: Will next year’s stress tests include a specific test for a disorderly Brexit?
Lloyds has issued a statement, confirming that it has passed today’s stress test. No, says Mark Carney. In 12 months time it will be too late.
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. Mark Carney @bankofengland says disorderly Brexit is "highly unlikely" and all parties are working towards avoiding it
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. Stress tests assumed UK GDP falls 4.7%, unemployment rises to 9.5%, house prices fall 33%. Carney says Hardest Brexit no worse than this.
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. Q: What is the impact of a disorderly Brexit on the banking sector, compared to an orderly one?
Standard Chartered says that it ‘notes’ it has passed today’s stress tests, adding; Mark Carney explains that today’s stress tests modelled a huge recession -- with growth slumping, unemployment tumbling, and the pound shedding a quarter of its value.
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. Under that scenario, UK banks lose £50bn of capital - but aren’t sunk by those losses.
So... a disorderly Brexit wouldn’t be any worse than that.
Carney says the Bank is putting its money where its mouth is, as it would be called on to support the UK banking scenario if Brexit goes badly.
He warns:
This [a disorderly Brexit] is not a good scenario... it is one we are all working to avoid as it has some quite material economic costs, even if the financial system continues to operate through it.