UK banks 'prepared for Brexit and trade war fall-out'

The Bank of England says the UK banking system is still resilient to the financial impact of a worst-case disorderly Brexit.

The comment came in its regular health check on the banks, the Financial Stability Report.

The Bank said "the perceived likelihood of no-deal Brexit has increased since the start of the year".

It said that "material risks" of economic disruption from such a scenario remain.

However, there had been "some improvement in the preparedness of the UK economy for no-deal Brexit".

Since last year, UK banks have been forced to hold back more capital, and demonstrate easy access to £1 trillion in funding (liquidity).

The Bank says that such a buffer would allow the banking system to continue to lend into the economy, even if the UK were shut out of international markets for three months.

This worst-case scenario stress test involves the economy shrinking by 4.7%, unemployment more than doubling to 9.5% and property prices falling by 33%.

Shocks absorbed

The Bank's key Financial Policy Committee went further than it has before by saying that the banking system would also be resilient to a disorderly Brexit occurring at the same time as a global trade war involving 25% tariffs on US-China trade, all global inputs and a 30% drop in the US stock market.

"Even if a protectionist-drive global slowdown were to spill over to the UK at the same time as a worst-case disorderly Brexit, the core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks and continue to serve UK households and businesses," it said.

The Bank did say, though, that the impact of rising expectations of no-deal was already being seen in "much weaker" levels of investment in markets dependent on foreign investors - for example, commercial property.

In the first quarter of this year, investment in commercial property was less than two-fifths (38%) of average levels in the past two years.

For high-risk corporate borrowing (leveraged loans), it was a less than a fifth of the levels seen in 2017 and 2018. Commercial real estate prices are falling again now.

The Bank also said it would be reviewing the macro-economic vulnerabilities of the economy on funding from "open-ended" funds, recently in the news after the problems with redemptions in Neil Woodford's fund.

The Bank is also beginning work to assess the impact on financial sector of climate change risks.