U.K. Stress Test Results: Banks To Survive No-Deal Brexit

The Bank of England (BoE) has released the results of its 2019 stress test. This is the third consecutive year in which all the seven major U.K.-based lenders — HSBC Holdings (NYSE:HSBC) , Barclays (NYSE:BCS) , Lloyds Banking (LON:LLOY) Group (NYSE:LYG) , Royal Bank of Scotland (LON:RBS) Group (NYSE:RBS) , Nationwide Building Society, Santander (MC:SAN) UK and Standard Chartered (OTC:SCBFF) — have shown resilience toward tougher economic scenarios.

Thus, none of the banks are required to raise additional capital and will be able to keep lending amid a severe challenging operating backdrop. Further, the test noted that “the major UK banks’ aggregate CET1 capital ratio after the 2019 stress scenario would still be more than twice its level before the crisis.”

Nonetheless, the banks’ resilience is majorly dependent on their ability to slash dividend payments, employee bonuses and coupon payments on corporate debt. They would have to trim collectively £41 billion during the first two years of a severe downturn.

Also, ‘leveraged lending’ – risky loans made to already indebted companies – remained on a rise. This reflected deterioration in asset quality.

Tougher Scenarios

A disorderly Brexit remained a key hypothetical scenario.

The hypothetical setups in the BOE’s stress test also included China’s economy declining 1.2%, global GDP contracting 2.6% (higher than the 2.4% fall in 2018 scenario) and the U.K. GDP falling 4.7%. Moreover, domestic unemployment rate of 9.2% (slight change from 9.5% scenario in 2018) and a rise in interest rates to 4% were among the other situations.

Further, the scenario assumed the U.K. residential property prices plunging 33%, commercial property prices tumbling 41%, roughly 30% decline in the value of the pound compared with the U.S. dollar and a 39% fall in oil price (up from 32% decline scenario last year).Also, a 55% plunge in Hong Kong residential property prices was taken in to account.

Backdrop for This Annual Exercise

This is the sixth year of the BoE stress test.

The primary goal of the test is to determine how much the banks would lose in case of a economic downturn. The test rounds help in determining how banks would respond to another economic crisis and a slump in the markets. Therefore, the BoE has come up with hypothetical scenarios that were considered while conducting the stress test.

Moving Forward

Mark Carney, BoE Governor, stated that the possibility of a no-deal Brexit has reduced following the general election. He said, “The probability of that scenario has gone down because of the election results and the intention of the new government. But the scenario itself and the risks which we protect the system against has not itself changed, it’s just become less likely.”

Further, the BoE is increasing the counter-cyclical capital buffer rate to 2% from 1%. This rise will enable lenders to absorb up to £23 billion of losses during a financial crisis without restricting lending.

With banks taking measures to strengthen their financials and confront challenges, the stress test will further help regulators to keep a check on them and avert another crisis. Further, this will boost the lending capacity of banks, thereby bolstering their financial position.

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Standard Chartered PLC (SCBFF): Free Stock Analysis Report

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