It’s been just 10 years since the last UK financial crisis, and the heavy criticism that followed that the banks were not adequately prepared for such an event. Who could forget the run on Northern Rock bank, the subsequent bailouts, and the recession that followed? With Brexit now coming to a head, the Bank of England is ‘quietly confident’ that UK banks are ready for all Brexit eventualities, and the impact it may have on the economy . So why has the Bank of England come to that conclusion?
Stress-testing for a cliff-edge Brexit
The BoE has modelled some of the more extreme economic scenarios that could fall out of a no-deal Brexit, and has then stress-tested lenders’ balance sheets against some of these scenarios. The good news is that the BoE has predicted that UK lenders will be able to withstand scenarios such as a fall in UK GDP of 4.7 per cent, and house prices plummeting by 33 per cent.
Yes, even banks need a rainy-day fund.
The requirement to hold a buffer was introduced in 2010 by the Basel Committee on Banking Supervision. The Bank of England now requires banks to hold a rainy-day fund, known as the counter-cyclical buffer (CCyB), which can be freed up to help ensure the economy does not stall. The CCyB is currently set at 1 per cent of banks’ total assets, but notes published by BoE recently show that the BoE was ready to lower lenders’ capital buffers to 0% in an attempt to maintain £250bn of lending to the wider economy; this was most recently done in July 2016. This £250bn boost to lending to UK households and businesses is designed to stabilise the UK economy in the event of an economic downturn.
Forcing banks to improve easy-to-sell assets
The BoE has been forcing lenders to improve the amount and quality of easy-to-sell assets, to enable them to lend more to UK households and businesses. Lenders now collectively hold £1 trillion of high-quality assets, and some lenders have placed collateral with the Bank of England to enable them to borrow even more to lend out should the economy call for it.
Mark Carney believes the BoE has put all the measures they can in place to prepare for a no-deal Brexit, although the nature of the exit has today become more complicated following the Prime Minister’s announcement to delay the vote on the draft Brexit agreement she negotiated with the EU.
Investment Marketing Team