Bank of England gives lenders all-clear, but warns of 'disorderly' Brexit risks

Britain's biggest lenders could withstand a "disorderly" Brexit and still keep lending, the Bank of England has said, but it warned of the risks of a no-deal for the UK.

The Bank's stress tests showed the UK's banking system could cope with an extreme economic stress scenario, equivalent to the worst possible outcome of the UK's departure from the EU.

All seven of the lenders tested were given a clean bill of health and will not have to bolster their financial strength for the first time since the annual health check on the sector was launched in 2014.

But Barclays and Royal Bank of Scotland (RBS) emerged as the weakest of the seven lenders tested and only passed thanks to action they have taken over the year to boost their balance sheets.

The Bank put seven of the biggest lenders through their paces - Lloyds Banking Group, Barclays, RBS, HSBC, Santander, Nationwide Building Society and Standard Chartered.

In its bi-annual Financial Stability Report, the Bank found the lenders were strong enough to "continue to support the real economy through a disorderly Brexit".

Banks could absorb £350 billion of losses over the next few years and still continue lending, it added.

But the Bank warned that it would need to look at whether banks needed to boost their financial balance sheet strength in case a "disorderly" Brexit was to coincide with a wider severe global recession.

Mark Carney
Mark Carney

It said: "In such circumstances, capital buffers would be drawn down substantially more than in the stress test and, as a result, banks would be more likely to restrict lending to the real economy."

Bank Governor Mark Carney also cautioned that a disorderly Brexit was "in nobody's interest".

He said: "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."

The impact of a no deal disorderly Brexit would include low growth, a further fall in the value of the pound and higher interest rates.

Mr 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.

"The 24-month period remains a good estimate."

We've published the results of our 2017 stress test.

-- Bank of England (@bankofengland) November 28, 2017

The Bank's report stated that, to preserve the continuity of existing cross-border insurance and derivatives contracts, UK and EU legislation would be required.

Six million UK policyholders, 30 million European Economic Area (EEA) policyholders, and around £26 trillion of outstanding uncleared derivatives contracts could otherwise be affected.

The Treasury is considering "all options for mitigating risks" to the continuity of outstanding cross-border financial services contracts, the report said.

Shares saw a mixed reaction for London-listed lenders included in the test, with HSBC 1% higher, but Lloyds and Barclays 2% lower and RBS stock edging down.

The Bank said that, despite passing the bank stress tests, lending giants would still have to boost their balance sheets by £6 billion to withstand other potential future shocks.

The doomsday scenario drawn up by the Bank for this year's stress test included a 33% fall in house prices, interest rates surging from 0.5% to 4% within two years, and the unemployment rate rising to 9.5% from its current rate of 4.3%.

Ewen Stevenson, chief financial officer at RBS, said: "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."

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