The UK financial system is strong enough to cope with a severe global slowdown and a “worst-case” disorderly Brexit simultaneously, the Bank of England has said.
Yet it warned that an increasingly likely no-deal scenario posed “material risks of economic disruption” and would likely cause volatility in asset prices and possibly disrupt cross-border banking.
The assessment of the UK’s banking sector came in Threadneedle Street’s final Financial Stability Report before Britain is due to exit the European Union on 31 October.
In recent months the chances of a no-deal Brexit have risen as Boris Johnson edges closer to Downing Street and the clock runs down. Johnson has pledged to leave at the end of October “come what may”.
The Bank’s governor Mark Carney said today that Britain’s “major financial institutions have done what’s necessary” to cope with such an outcome.
The report said banks were strong enough “continue to lend through the wide range of UK economic and financial shocks” caused by Brexit.
Yet it said that “a range of UK asset prices” such as sterling, shares, and corporate and government debt, “would be expected to adjust sharply, tightening financial conditions for UK households and businesses,” the FPC said.
Carney warned that share trading “would be one example where European actions have the potential to create some disruption that could have knock on effects”. UK and EU regulators have been locked in a battle over how exactly cross-border share trading will work after Brexit.
Globally, “rising trade tensions have resulted in declining business confidence and pose material downside risks to global output growth,” the FPC said.
A shock to the global system would be amplified by “underlying vulnerabilities” such as high debt levels in both the US and China. A global loss of confidence could damage their ability to pay down their debt piles.
The Bank of England said it was confident that “the core of the UK banking system remains resilient to these global risks”, however.
“The core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks” from a severe trade war and a no-deal Brexit, the Bank said.
Carney raised questions over whether the government had done enough work on trade infrastructure such as customs systems to be ready for no deal.
“There has been progress there [but] it is not yet all the way there,” he said. Carney added that UK companies that export only to the EU needed to be better prepared.
“It’s a mixed picture” regarding firms’ knowledge about post-Brexit rules and regulations on trade, he said.
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