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November 29, 2017

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UK’s biggest banks able to withstand ‘hard Brexit’

BRITAIN’S biggest banks are strong enough to withstand a “hard Brexit” and could even weather a deeper recession than the one they struggled through during the global financial crisis nearly a decade ago, the Bank of England said yesterday.

While concluding that lenders would still have enough capital to provide credit to households and businesses if Britain crashes out of the European Union without a deal, the BOE warned that the picture wouldn’t be so clear-cut if a so-called “disorderly” Brexit happens during a sharp global recession.

In its annual stress test of the sector, the BOE said the country’s biggest lenders, such as Barclays and Lloyds Bank, were “resilient” overall to adverse scenarios, including deep recessions at home and abroad and hefty falls in the price of assets.

“Despite the severity of the tests, for the first time since the bank began stress testing in 2014, no bank needs to strengthen its capital position as a result,” BOE Governor Mark Carney said.

Stress tests have become a key policy instrument of central banks around the world since the global financial crisis. In Britain’s case, many of the country’s banks, including Royal Bank of Scotland, had to be bailed out by taxpayers at the height of the global crash in 2008 because they weren’t strong enough to cope with the shock.

In what is a war-gaming exercise, the BOE tested banks’ ability to withstand a recession that was even worse than the one that took place after the global financial crisis nearly a decade ago.

Included in the test was the simulation of a 2.4 percent fall in global GDP, a 4.7 percent contraction in Britain, a 33 percent crash in the housing market crash, a further 27 percent fall in the value of the pound, which would take it well below one-to-one with the dollar, and a rise in interest rates to 4 percent from the current 0.5 percent.

In such a case, the BOE said banks would incur losses of 50 billion pounds (US$65 billion) in the first two years of the stress.


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