BoE Stress Test: UK Banks Can Withstand Adverse Scenario Shocks

The Bank of England tested the ability of the UK largest banks and building societies to withstand capital requirement in the environment of the adverse macroeconomic scenario of 4.7% drop in output, sharp depreciation of Sterling, drop in house prices and misconduct fines.

The result is positive with all of the banks withstanding the test under the scenario of “disorderly” Brexit.HSBC, Lloyds Banking Group, Nationwide Building Society, Santander UK and Standard Chartered all passed the health check, which was based on end-2016 data, while RBS and Barclays fell below the systemic reference points for common equity Tier 1 capital and Tier 1 leverage ratio, but were not required to submit a new capital plan.

“For the first time since the Bank of England launched its stress tests in 2014, no bank needs to strengthen its capital position as a result of the stress test. The 2017 stress test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs,” the Bank of England said in the stress test report.

The Bank of England Governor Mark Carney emphasized during the press conference that no transition trade deal between the UK and EU would be the most undesirable scenario putting the financial system on both sides of the Lamanche channel in threat.

“Disorderly Brexit would cause slower growth, higher unemployment and weaker currency in short term,” Carney said during the press conference in London.

The GBP/USD currency pair initially welcomed the result of the stress tests jumping up to $1.3350 but retreated it gains soon after as results were digested by the market. The GBP/USD is still supported by the uptrend support line on a 15-minutes time frame.