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LONDON (Alliance News) - UK banks are strong enough to withstand a disorderly Brexit and the country's financial system is resilient to the wide range of risks it could face, according to Bank of England's latest stress test results.
The central bank, in a separate statement on effects of various Brexit scenarios, said the sterling would crash, inflation soar, interest rates would have to rise and growth would plummet in the event of a no deal disorderly Brexit.
BoE said, in the event of a disorderly no deal Brexit, GDP could fall by 8%, sterling plummet 25%, unemployment rate rise by 7.5%, inflation surge 6.5% and interest rates could rise as high as 5.5%.
The doomsday analysis comes after the government earlier on Wednesday released its own impact assessment, which found that the withdrawal from the EU under Prime Minister Theresa May's plans could cut the UK's GDP by up to 3.9% over the next 15 years. But leaving the EU without a deal could result in a 9.3% drop in UK GDP over the same period.
The 2018 stress test released late Wednesday shows that the UK banking system is resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis and that are combined with large falls in asset prices and a separate stress of misconduct costs.
In the 2018 stress-test scenario, UK GDP falls by 4.7%, the UK unemployment rate rises to 9.5%, UK residential property prices fall by 33% and UK commercial real estate prices fall by 40%. The scenario also includes a sudden loss of overseas investor appetite for UK assets, a 27% fall in the sterling exchange rate index and Bank Rate rising to 4%.
The test scenario additionally included worst case assumptions like sudden imposition of trade barriers with the EU, loss of existing trade agreements with other countries, severe customs disruption, a sharp increase in the risk premium on UK assets and negative spillovers to wider UK financial markets.
Stress tests were introduced in the wake of the financial crisis and are designed to measure the resilience of participating banks in adverse economic conditions. The tests are intended to model for unlikely severe economic and financial shocks.
The BoE said that the seven participating banks, which include Royal Bank of Scotland Group PLC, Barclays PLC, HSBC Holdings PLC, Lloyds Banking Group PLC, Standard Chartered PLC, Nationwide Building Society and Santander UK did not reveal capital inadequacies and were consequently not required to submit a revised capital plan.
"All participating banks remain above their risk-weighted capital and leverage hurdle rates and would be able to continue to meet credit demand from the real economy, even in this very severe stress," BoE said.
Lloyds Banking Group, Standard Chartered, HSBC, Royal Bank of Scotland and Santander UK noted the latest stress test results in separate statements.
On Tuesday, the central bank changed the timing for the publication of its annual stress tests to 1630 GMT from 0700 GMT previously planned. BoE had already brought forward the release of the report to Wednesday, having previously expected to release the results on Tuesday next week, following confirmation of parliament's meaningful vote on the EU Withdrawal Agreement on December 11.
Shares in tax-payer owned RBS closed down 0.7% at 219.96 pence each on Wednesday. Barclays shares closed 0.9% lower at 166.80p; HSBC shares closed 0.5% lower at 669.50p; Lloyds shares closed broadly flat at 56.34p and Standard Chartered shares closed 0.3% higher at 612.70p.
