For the first time since the financial crisis, all of the UK’s biggest lenders have passed the Bank of England’s stress tests.
The tests imagine a series of adverse economic scenarios to see whether the banks could continue to lend money to support the UK economy.
The Bank said Barclays and RBS did not pass the stress tests in a snapshot of their businesses at the end of 2016.
However, both banks had improved their financial positions since then.
And, as a result, both were deemed to have passed the stress tests overall.
The worst case scenario the Bank imagined included a 33% fall in house prices, a rise in interest rates from 0.5% to 4% within two years, and the unemployment rate rising to 9.5% from its current rate of 4.3%.
The Bank also looked more closely at the impact of Brexit and concluded that even a disorderly Brexit would be no worse than the economic stresses the banks were asked to pass anyway.
There were other Brexit concerns, however.
Six million UK customers buy insurance policies from EU companies and, after Brexit, those firms would not have permission to collect premiums or pay claims.
The same is true of the financial insurance that banks buy and sell to each other. Here the numbers are staggering – the notional value of those contracts are £26 trillion.
Without legislation from both the EU and the UK they may be hard to enforce and that would create financial instability.
The Bank of England offered a checklist of items to mitigate the impact of Brexit which included:
- A clear EU-UK regulatory framework in place
- Timely agreement on an implementation period
- Legislation on both sides to preserve continuity of existing cross-border insurance and derivative contracts
These are already ambitions of the government, but the Bank has made it clear that while Brexit will not be worse than the economic nightmare of its imagination, there is still plenty of work to do.
Last year’s stress tests showed RBS was the worst prepared of the UK’s biggest lenders to cope with another financial crisis.
Looking at this year’s results, the bank’s chief financial officer, Ewen Stevenson, said: “We continue to make progress towards the stress-resilient bank we aspire to be and 2017 represented another year of material improvement.
“Until we have resolved our remaining major legacy conduct issues and non-core portfolio interests, we will continue to show stress test results weaker than our long term targets.”
In a statement, Barclays said: “Barclays was not asked to submit a revised capital plan by the Bank of England in light of the steps already taken during 2017.”