Our stress test shows that UK banks could continue to lend in a scenario more severe than the financial crisis.
UK banks are prepared and strong enough to continue to serve UK households and businesses even through a disorderly Brexit.
The UK government is making sure the financial services UK households and businesses get from EU providers won’t be disrupted.
The Financial Policy Committee (FPC) aims to ensure the UK financial system is resilient to, and prepared for, the wide range of possible risks it could face — so that the system can serve UK households and businesses in bad times as well as good.
The 2018 stress test shows 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.
Since the EU referendum in 2016, the FPC and other authorities have identified risks of disruption to the financial system that could arise from Brexit and worked to ensure they are addressed. Stress tests and supervisory actions have ensured major UK banks have levels of capital and liquidity to withstand even a severe economic shock that could be associated with a disorderly Brexit. The Government is taking forward the legislation necessary to avoid disruption to financial services provided by EU firms to UK households and businesses. The Bank, other UK authorities and financial companies have engaged in extensive contingency planning.
The FPC has reviewed a disorderly Brexit scenario, with no deal and no transition period, that leads to a severe economic shock. Based on a comparison of this scenario with the stress test, the FPC judges that the UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit.
Most risks of disruption to the financial services that EU firms provide to UK households and businesses have been addressed, including through legislation. Further UK legislation, currently in train, will need to be passed to ensure the legal framework for financial services is fully in place ahead of Brexit.
The FPC is maintaining the UK countercyclical capital buffer (CCyB) rate at 1%. It stands ready to move the UK CCyB rate in either direction as the risk environment evolves.
Leveraged lending to businesses has grown rapidly, both globally and, more recently, in the UK. Strong creditor risk appetite, including for securitisations of leveraged loans, has loosened underwriting standards materially. However, UK banks’ holdings of these securitisations are very small and their aggregate exposures to leveraged lending were covered in the Bank’s 2018 stress test.
Risks to UK financial stability from global debt vulnerabilities are material. Reflecting that, the FPC incorporated a very severe global stress in the 2018 stress-test scenario.
The FPC has completed an in-depth assessment of the risks associated with leverage from the use of derivatives in the non-bank financial system. Risks of forced sales to meet derivative margin calls currently appear limited. However, more comprehensive and consistent monitoring by authorities is needed to keep this under review.