UK lenders can withstand no-deal Brexit and global trade war, Bank says
The Bank of England has said Britain’s lenders could withstand the worst case no-deal Brexit and a full-scale global trade war but warned “material risks of economic disruption” remain from a cliff-edge EU withdrawal.
In the latest report from the Financial Policy Committee (FPC), the Bank said it had assessed lenders against a doomsday no-deal Brexit scenario together with a global slowdown sparked by the US-China trade war and found they would still be able to continue lending to UK households and businesses.
But it warned “material risks” remain to the UK economy as the threat of a no-deal Brexit has increased, while rising global trade tensions also pose a significant threat to global growth.
It said: “The perceived likelihood of a no-deal Brexit has increased since the start of the year.
“The UK banking system remains strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit,” it added.
The FPC cautioned that EU authorities still needed to take further action to help protect against some risks that remain, particularly ensuring banking services between UK and EU banks can remain in place after EU withdrawal.
It said half of all clients of major UK banks had not completed the necessary paperwork for EU derivative trades.
The lack of action by the EU is likely to largely affect European households and businesses, but could be expected to spill back to the UK and amplify market volatility.
In the Financial Stability Report, the Bank said: “Some operational risks therefore remain, including if many clients seek to mitigate to the EU entities at the last minute.
“These could amplify any disruption in the market.”
The rising no-deal Brexit fears have already been affecting the UK economy, hitting investment into the UK and markets that are particularly dependent on foreign investors, such as commercial real estate and leveraged lending.
The Brexit threat comes at a time of mounting trade tensions between the US and China, which the FPC said have “resulted in declining business confidence and pose material downside risks to global growth output”.
UK banks are around 60% exposed to the international economy.
In its assessment of UK bank strength, the Bank said it assumed the worst case no-deal Brexit outcome, as well as a trade war outcome that saw the US and China ramp up their tariffs by 25%, as well as a slowdown in global growth to 2%.
The FPC said it was satisfied that its most recent stress test at the end of 2018 was tougher even than this outcome and that banks would withstand the double-whammy hit.
The report also revealed the Bank is launching a review of funds like Neil Woodford’s suspended equity income fund.
It will look at potentially imposing restrictions that could ban funds invested in illiquid assets from offering short term notice periods.