High street banks can withstand a disorderly Brexit, the Bank of England has said, even though Royal Bank of Scotland and Barclays struggled in its latest health check on the sector.
For the first time since 2014, when Threadneedle Street conducted its first annual stress tests, the major lenders have not been required by the UK central bank to raise billions of pounds more of capital to strengthen their finances.
But RBS, 70%-owned by the taxpayer, and Barclays only passed the hurdle rate set by the Bank because the regulator took account of efforts they had already made to increase their financial strength since the end of last year, when the tests were applied.
The Bank of England is alert to the risks poised by Brexit and in its half-yearly review of risks to the financial system warns that a disorderly Brexit coupled with a severe global recession and more multi-billion pound fines from global regulators could mean it would have to reconsider its assessment.
The seven lenders assessed – which also include HSBC, the UK arm of Santander and Nationwide – would incur £50bn of losses under the hypothetical scenario imposed on their financial position at the end of 2016.
This scenario included a 4.7% fall in UK GDP, a 33% fall in house prices, interest rates rising to 4% and a 27% fall in the pound.
The Bank said these outcomes could be associated with Brexit and that its financial policy committee, set up to assess risks to the financial system, had judged that “the UK banking system could continue to support the real economy through a disorderly Brexit”.
It added: “However 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.”