All of Britain’s top lenders could weather the worst-case scenario in the case of a no-deal Brexit, new figures have shown.
The banking sector is “resilient to and prepared for the wide range of UK economic and financial shocks that could be associated with a worst-case disorderly Brexit,” the Bank of England said on Monday.
The banks could keep on lending throughout a potential financial crisis, however some might have to cut some spending to stay afloat, the Bank said.
It is part of an annual stress test which simulates a scenario worse than the financial crisis.
All the UK’s main lenders could withstand a perfect storm where world gross domestic product (GDP) fell by 2.6%, UK GDP dropped by 4.7%, Bank rates rose to 4%, and unemployment jumped to 9.2%. The scenario also includes costs for bank misconduct.
However, the country’s banks would take a bigger hit from their corporate lending than in the last test, as they are giving out riskier loans to companies.
Banks have granted around 8% of their business loans, or £67 billion, to companies with a high debt-to-cash ratio. This means they owe more for each pound they hold in cash than other firms. These riskier loans would account for 15% of banks’ losses in the scenario.
“Losses on corporate exposures are higher than in previous tests, reflecting some deterioration in asset quality and a more severe global scenario,” the Bank said.
“Despite this, and weakness in banks’ underlying profitability … all seven participating banks and building societies remain above their hurdle rates.”
The banks would also withstand financial problems caused by Brexit, the trade war between the US and China, and unrest in Hong Kong, the Bank said, as none will create a situation worse than the scenario that the Bank of England simulated.
Some banks relied on cutting staff bonuses, dividends and other distributed earnings to pass the stress test.
The Bank plans to increase banks’ shock pads, doubling the level of countercyclical capital buffer, which helps them absorb day-to-day issues, to 2% of risk-weighed assets.
This would allow the sector to absorb £23 billion worth of losses and keep on lending up to £500 billion to households and businesses.
This would then allow lenders to hold less last-ditch funds which are there to bail out a failing bank without the taxpayer having to get involved. The former is seen as better for banks than the latter.