According to the stress tests carried out by the Bank of England this week, the UK banking sector is “resilient” enough to withstand even a worst-case “no-deal” Brexit scenario.
Worst Case Scenario
Each of the UK’s main banks underwent their yearly “stress tests” this week, designed to illuminate any weaknesses within the financial system. As part of the tests, analysts measured how the banking sector could withstand the worst of financial shocks.
The most extreme scenario used was one that far surpasses the current predictions for the fallout from a “no-deal” Brexit.
In the conditions used, the UK would crash out of the EU without a deal, sending GDP lower by 4.7%. Meanwhile, interest rates would climb 4%, with the unemployment rate rocketing up to 9.2%.
This constitutes the most severe “stress test” conducted over recent years.
All Banks Pass BOE Stress Tests
However, investors will be pleased to know that each of the UK’s leading banks survived the tests. But, the tests did reveal that Barclays and Lloyd’s would need to trigger their emergency debt-to-equity conversions as a result of changes to accountancy due to take place in 2023.
That being said, in total, the capital ratios of the main banks combined was still over 200% more than they were after the financial crisis in 2008.
Following the tests, the BOE recommended that each of the banks involved increase its capital buffers by 1%.
Financial Stability Report Cites Brexit Risks
Along with the stress test results, the BOE also released its financial stability report.
In it, the BOE noted:
“Against a backdrop of Brexit-related uncertainty, growth has slowed and international investor demand for assets, notably commercial real estate, has fallen.”
BOE To Keep Rates on Hold Despite Dovish Risks
This assessment from the bank comes ahead of the final Monetary Policy Meeting of the year due on Thursday. Despite the concern for the economy, we aren’t expecting the BOE to cut rates at this point.
At the November meeting, two of the BOE’s policy-makers voted in favor of rate cuts. This marked the first support for such a move since the 2016 rate cut.
However, the Conservative party has now won a majority in parliament. And Johnson will probably be getting the backing he needs for his deal on Friday. So, it seems likely that the UK will leave the EU by the planned date of January 31st.
This greater level of clarity has been welcomed by traders. The BOE, as such, is likely to keep its powder dry at this point. This is particularly true given that there is a growing risk later into 2020, following news that the PM will add a clause to Friday’s bill to block parliament from extending the December 31st deadline for the Brexit transitional phase.
The bill means that the UK will leave the single market on that date regardless of whether the UK and EU have agreed on a trade deal.
EURGBP found support at a test of the .8317 level this week and is currently retesting the broken .8477 support. If price moves back above here, focus will shift to a retest of the .8659 level, where e also have the bearish trend line from year to date highs. To the downside, the main level to watch is the .8317 region.