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| High street banks 'can cope with disorderly Brexit' | High street banks 'can cope with disorderly Brexit' |
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| Lenders pass Bank of England stress tests but, for RBS and Barclays, only because they have already raised extra funds | Lenders pass Bank of England stress tests but, for RBS and Barclays, only because they have already raised extra funds |
| Jill Treanor | Jill Treanor |
| Tue 28 Nov 2017 11.43 GMT | Tue 28 Nov 2017 11.43 GMT |
| First published on Tue 28 Nov 2017 07.30 GMT | First published on Tue 28 Nov 2017 07.30 GMT |
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| High street banks can withstand a disorderly Brexit, the Bank of England has said, even though Royal Bank of Scotland and Barclays struggled in its latest health check on the sector. | High street banks can withstand a disorderly Brexit, the Bank of England has said, even though Royal Bank of Scotland and Barclays struggled in its latest health check on the sector. |
| For the first time since 2014, when Threadneedle Street conducted its first annual stress tests, the major lenders have not been required by the UK central bank to raise billions of pounds more of capital to strengthen their finances. | For the first time since 2014, when Threadneedle Street conducted its first annual stress tests, the major lenders have not been required by the UK central bank to raise billions of pounds more of capital to strengthen their finances. |
| Stress tests are used to assess the financial strength of a bank. They are based on hypothetical scenarios but designed with historic events in mind, such as the Black Monday stock market crash in 1987 or the banking crisis of 2008. In the 1990s, banks devised their own tests and used them to measure the impact on their trading positions. But the fallout from the banking crisis has given them more prominence, and illustrates why we need them. Banks collapsed in 2008 because they did not have the financial strength to withstand their losses. In 2014, the Bank of England began annual stress tests on the biggest lenders, publishing the scenarios that would be used and publishing the results. Each bank has its own pass rate – and if they fail can be required to find more capital. | Stress tests are used to assess the financial strength of a bank. They are based on hypothetical scenarios but designed with historic events in mind, such as the Black Monday stock market crash in 1987 or the banking crisis of 2008. In the 1990s, banks devised their own tests and used them to measure the impact on their trading positions. But the fallout from the banking crisis has given them more prominence, and illustrates why we need them. Banks collapsed in 2008 because they did not have the financial strength to withstand their losses. In 2014, the Bank of England began annual stress tests on the biggest lenders, publishing the scenarios that would be used and publishing the results. Each bank has its own pass rate – and if they fail can be required to find more capital. |
| But RBS, 70%-owned by the taxpayer, and Barclays only passed the hurdle rate set by the Bank because the regulator took account of efforts they had already made to increase their financial strength since the end of last year, when the tests were applied. | But RBS, 70%-owned by the taxpayer, and Barclays only passed the hurdle rate set by the Bank because the regulator took account of efforts they had already made to increase their financial strength since the end of last year, when the tests were applied. |
| The Bank of England is alert to the risks poised by Brexit, and in its half-yearly review of risks to the financial system warns that a disorderly Brexit coupled with a severe global recession and more multibillion pound fines from global regulators could force it to reconsider its assessment. | The Bank of England is alert to the risks poised by Brexit, and in its half-yearly review of risks to the financial system warns that a disorderly Brexit coupled with a severe global recession and more multibillion pound fines from global regulators could force it to reconsider its assessment. |
| The seven lenders subjected to the test – which also include HSBC, Lloyds, Standard Chartered, the UK arm of Santander and Nationwide Building Society – would incur £50bn of losses under the hypothetical scenario imposed on their financial position at the end of 2016. Losses on this scale would have wiped out bank capital 10 years ago. | The seven lenders subjected to the test – which also include HSBC, Lloyds, Standard Chartered, the UK arm of Santander and Nationwide Building Society – would incur £50bn of losses under the hypothetical scenario imposed on their financial position at the end of 2016. Losses on this scale would have wiped out bank capital 10 years ago. |
| This scenario included a 4.7% fall in UK GDP, a 33% fall in house prices, interest rates rising to 4% and a 27% fall in the pound. | This scenario included a 4.7% fall in UK GDP, a 33% fall in house prices, interest rates rising to 4% and a 27% fall in the pound. |
| Mark Carney, the governor of the Bank of England, said this was a worst-case scenario of what could happen if the UK crashed out of the EU and would cause some pain. | Mark Carney, the governor of the Bank of England, said this was a worst-case scenario of what could happen if the UK crashed out of the EU and would cause some pain. |
| “This is not a good scenario; it’s a scenario that we are all trying to avoid because it has some quite material economic costs even if financial system continues to function through it,” Carney said. | “This is not a good scenario; it’s a scenario that we are all trying to avoid because it has some quite material economic costs even if financial system continues to function through it,” Carney said. |
| However, he added that a disorderly Brexit was an “unlikely event” as the UK government and EU leaders had said it was in no one’s interest for the UK to leave the EU without a transition deal. | However, he added that a disorderly Brexit was an “unlikely event” as the UK government and EU leaders had said it was in no one’s interest for the UK to leave the EU without a transition deal. |
| “Our predisposition is to expect we will continue to have a highly cooperative relationship with Europe,” said Carney, adding the Bank’s job was to prepare for the worst. | “Our predisposition is to expect we will continue to have a highly cooperative relationship with Europe,” said Carney, adding the Bank’s job was to prepare for the worst. |
| The Bank’s financial policy committee (FPC), set up to assess risks to the financial system, had judged that “the UK banking system could continue to support the real economy through a disorderly Brexit”. | The Bank’s financial policy committee (FPC), set up to assess risks to the financial system, had judged that “the UK banking system could continue to support the real economy through a disorderly Brexit”. |
| Carney said, though, that the question the sector faced was something else happening at the same time, such as a global recession or more fines for misconduct. | Carney said, though, that the question the sector faced was something else happening at the same time, such as a global recession or more fines for misconduct. |
| Banks would be required to hold an extra £6bn in capital by next November, but the BoE will review whether they will need to build an additional cushion in light of the potential risks in the UK banking system. | Banks would be required to hold an extra £6bn in capital by next November, but the BoE will review whether they will need to build an additional cushion in light of the potential risks in the UK banking system. |
| The Bank has already warned that the banking sector could incur £30bn-worth of losses on consumer credit – credit cards, personal loans and car finance – if interest rates and unemployment rose sharply. | The Bank has already warned that the banking sector could incur £30bn-worth of losses on consumer credit – credit cards, personal loans and car finance – if interest rates and unemployment rose sharply. |
| On Tuesday, the Bank revealed that losses on mortgage lending would reach £17bn and that more borrowers would run into difficulty maintaining their payments as a result of significant rises in interest rates. It has assumed a further £40bn of fines on top of £60bn already incurred since the financial crisis. | On Tuesday, the Bank revealed that losses on mortgage lending would reach £17bn and that more borrowers would run into difficulty maintaining their payments as a result of significant rises in interest rates. It has assumed a further £40bn of fines on top of £60bn already incurred since the financial crisis. |
| It added: “The FPC continues to assess the risks of disruption to UK financial services arising from Brexit so that preparations can be made and action taken to mitigate against them.” | It added: “The FPC continues to assess the risks of disruption to UK financial services arising from Brexit so that preparations can be made and action taken to mitigate against them.” |
| Bank officials have already warned about the need for a Brexit transition deal by Christmas. In its latest risk assessment it set out a checklist to be addressed to avoid chaos in the UK financial sector when Britain leaves the EU in March 2019. It included: | Bank officials have already warned about the need for a Brexit transition deal by Christmas. In its latest risk assessment it set out a checklist to be addressed to avoid chaos in the UK financial sector when Britain leaves the EU in March 2019. It included: |
| • The need for a UK legal framework • “Timely agreement” on a transition deal• £26tn of derivatives contracts could be at risk and 36m insurance policies for households in the UK and EU• 160 banks and insurance companies in the European Economic Area need authorisation to operate in the UK from the Bank, which will set out its approach to regulation by the end of the year. | • The need for a UK legal framework • “Timely agreement” on a transition deal• £26tn of derivatives contracts could be at risk and 36m insurance policies for households in the UK and EU• 160 banks and insurance companies in the European Economic Area need authorisation to operate in the UK from the Bank, which will set out its approach to regulation by the end of the year. |
| For the first time the viability of UK banks’ financial health and business models were also tested against a longer-term scenario of seven years of weak global growth, low interest rates and high legal costs and fines for misconduct. | For the first time the viability of UK banks’ financial health and business models were also tested against a longer-term scenario of seven years of weak global growth, low interest rates and high legal costs and fines for misconduct. |
| The Bank said that this test had found that lenders would take the axe to costs – possibly by cutting jobs – to deal with the rise of fintech firms. | The Bank said that this test had found that lenders would take the axe to costs – possibly by cutting jobs – to deal with the rise of fintech firms. |
| The results of the stress tests will be closely watched by the Treasury, which said it wanted to sell off £15bn of its stake in RBS, which is worth about two-thirds of the bank’s value, even though this would leave taxpayers with a £26bn loss. | The results of the stress tests will be closely watched by the Treasury, which said it wanted to sell off £15bn of its stake in RBS, which is worth about two-thirds of the bank’s value, even though this would leave taxpayers with a £26bn loss. |
| RBS shares were little moved on the stress test results although Barclays fell 1% as its chief executive, Jes Staley, hopes to start increasing the dividend after cutting it for the last two years. Lloyds shares were also down after it fared worse than in last year’s stress test. | RBS shares were little moved on the stress test results although Barclays fell 1% as its chief executive, Jes Staley, hopes to start increasing the dividend after cutting it for the last two years. Lloyds shares were also down after it fared worse than in last year’s stress test. |
| Under the stress scenario, none of the banks pays dividends or bonuses during the period. | Under the stress scenario, none of the banks pays dividends or bonuses during the period. |
| Next year’s stress tests would not involve a “hard” Brexit test, as Carney said it would be too late by then. | Next year’s stress tests would not involve a “hard” Brexit test, as Carney said it would be too late by then. |
| • Follow Guardian Business on Twitter at @BusinessDesk, or sign up to the daily Business Today email here. | • Follow Guardian Business on Twitter at @BusinessDesk, or sign up to the daily Business Today email here. |
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