Banks Can Cope With No Deal Brexit

Published / Last Updated on 28/11/2017

Bank of England Stress TestsBanks Can Cope With No Deal Brexit.

In a totally unsurprising announcement, the Bank of England has completed its review of the UK’s seven largest banks to assess capital adequacy and reserves should there be a ‘no deal’ Brexit and other economic facts putting strains on Banks such as:

  • The pound collapses (it already has, does this mean they expect worse?)
  • Forcing Bank of England Interest rates rises to 4% pa
  • Gross Domestic Product (UK’s total economic output) falls to -4.7% pa
  • And Unemployment rises to 9.5%
  • Driving house prices down by 33%

The seven banks that faced the ‘stress test’ were Barclays, HSBC, Lloyds Banking Group, Nationwide, Royal Bank of Scotland, Santander UK and Standard Chartered and all passed.  This is the first time that all seven banks have passed the stress tests given that the above economic test could cost banks £50bn.

Comment

A little tongue in cheek.  You would expect an element of positivity anyway, given that confidence is key as we approach Brexit.  Given the above assumptions, we decided to look back at what the economic position was when the Credit Crunch first started to break in August and September 2007.  

In August 2007, French bank BNP Paribas froze the assets of hedge funds heavily exposed to the US sub-prime mortgage market and in September there was a ‘3 day’ run on Northern Rock in the UK, heavily exposed to toxic mortgage debt (high lending multiples that people could not afford to pay).  Remember those names: HBOS? Northern Rock? Bradford & Bingley? Alliance & Leicester? And a string of provincial building societies such as the Derbyshire, Cheshire, Dunfermline?  What about the Royal Bank of Scotland?  Still here but the biggest corporate losses in UK history.  Not forgetting US, Spanish and also those Icelandic Banks.

So let’s have a look at the economic numbers between 2007 and 2009:

  • Pound collapsed – Yes, we can still remember €1.04 to the £1.
  • Bank of England Interest rates in August 2007 were 5.75% pa
  • Gross Domestic Product (UK’s total economic output) -2.1% pa was the lowest point during that period in Q4 2008
  • And Unemployment was 8% in 2009 and it actually rose to 8.5% in 2011
  • House prices fell by over 20% in 18 months between Q3 2007 and Q1 2009.

The reality is the worst case scenario stress tests are very close to what actually happened at points and we hope the Bank of England has really got these capital adequacy stress tests right given the banking collapses of 2007-09.  If they haven’t we could be in for another rocky ride and a big stock market crash yet again.


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