Barclays and Royal Bank of Scotland (RBS) were the only major banks with black marks against their names in the Bank of England's annual stress tests, as it gave a relatively upbeat account of the resilience of the British banking system, even in the face of a chaotic Brexit deal.
Banks would incur losses of £50bn within the first two years of its main stress test scenario, which included a massive fall in house prices, a global recession, and four per cent interest rate to combat surging inflation, the Bank of England (BoE) said.
The BoE today announced that Barclays and RBS fell below their systemic reference points, the capital ratios required to withstand shocks to the financial system without needing a government bailout, based on end-2016 figures.
However, none of the banks failed the stress tests overall, with the BoE judging RBS, which failed last year, and Barclays had done enough in the past year to edge over the point where they would need more capital.
All of the banks therefore passed the tests, and none of the lenders, which also included HSBC, Standard Chartered, Lloyds, Santander and the Nationwide building society, must raise extra capital as a result.
In a wide-ranging assessment of the state of the banking sector, the BoE also:
Said its tests showed the banking system could withstand even the most disorderly Brexit scenario.
Announced it will raise the countercyclical buffer, a measure designed to add extra resilience while the sun is shining, from 0.5 per cent to one per cent by November 2018. That will add an extra £5.8bn onto bank capital requirements, the BoE said.
Said its Prudential Regulation Authority (PRA) will make an announcement on authorisation requirements for EU bank branches, mainly in the wholesale space, operating in the UK after Brexit before the end of the year.
The BoE introduced the stress tests in the aftermath of the financial crisis in an effort to make sure a similar lending freeze could not happen again. The BoE said this year's tests are “more severe than the global financial crisis”.
The £50bn losses sustained by banks in the imagined scenario would have wiped out their capital base a decade ago, but the BoE is now confident the buffers banks have built up can take the hit without preventing the lending required to the broader economy.
The report from the financial policy committee, (FPC) responsible for maintaining the stability of the banking system, said that “major UK banks' capital strength has tripled since 2007”, the year the financial crisis started to be felt.
The BoE judged that domestic risks facing the UK economy are still at a “standard level overall”, with one large caveat: Brexit.
“There are potential risks arising from the macroeconomic consequences of some possible Brexit outcomes,” the FPC said.
The BoE has not made any public judgement on the likelihood of a disorderly, “no deal” Brexit scenario, noting “there are many possible combinations of risks”.
The FPC believes the stress tests will cover the macroeconomic risks associated with even the worst outcome for the UK economy. However, it said: “the combination of a disorderly Brexit and a severe global recession and stressed misconduct costs could result in more severe conditions than in the stress test.”