UK banks are strong enough to handle no-deal Brexit

Mark Carney

Britain’s biggest lenders are strong enough to cope with a blow to the financial system worse than a no-deal Brexit, the latest round of annual bank stress tests has found.

All seven groups assessed by the Bank of England would be able to continue lending to households and businesses even in the event of turmoil more extreme than the industry faced during the 2008 financial crisis.

The Bank said that its latest test was severe enough to encompass the fallout from any of the current risks that potentially face the world economy, including an escalation of global trade tensions and the instability in Hong Kong.

This is the third consecutive year that none of the seven banks subjected to the test have been required to bolster their capital positions as a result of the examination.

The groups assessed were Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander’s UK business, Standard Chartered and Nationwide and the results were released after the market closed yesterday.

The Bank started regular stress testing of the country’s biggest lenders in 2014. The tests formed part of a number of measures designed to make banks safer in the wake of the financial crisis, when the taxpayer was forced to rescue some of Britain’s largest lenders to avert a meltdown of the country’s financial system.

This year’s simulation examined the impact on the lenders’ capital buffers of simultaneous UK and world recessions, a sharp sell-off in currency and stock markets, and a hit caused by heavy regulatory fines for misconduct.

Nationwide Building Society put in the most resilient performance, with its common equity tier one capital ratio, a key measure of a lender’s financial health, falling to 13.1 per cent from 31.7 per cent.

The test found that Lloyds and Barclays would need to convert loss-absorbing debt into equity to withstand the worst-case scenario examined.

The Bank also cautioned that all seven lenders passed the test partly because they would be able to cut dividends paid to their shareholders and coupon payments to their bond investors.

Mark Carney, the outgoing governor of the Bank, said this “underscores that investors should be aware that banks would make such cuts as necessary” if the stresses were to materialise.

Rob Smith, a partner at KPMG UK, said the test results “will no doubt be reassuring for UK banks, their customers and shareholders” but added: “Investors won’t miss the warning that in order to survive these stresses dividends dropped to near zero.”

Even after the scenario examined by the test, the lenders’ aggregate tier one capital ratio would still be more than twice their pre-financial crisis level, the Bank found.

Rob James, a fund manager and financials analyst at Merian Global Investors, said: “As an investor in UK banks, this capital strength gives me enormous comfort that the system is secure.”

This year’s test was slightly more severe than the scenario the lenders faced last year.

The Bank’s simulation included a gross domestic product fall of 4.7 per cent in Britain and 2.6 per cent globally. It also included a 33 per cent drop in UK residential property prices and a 30 per cent depreciation in the pound against the US dollar.