Bank Of England Forces Banks To Hold Extra £6bn Brexit Buffer

According to its latest Financial Stability Report, the BoE said a combination of a "disorderly" Brexit, severe global recession and stressed misconduct costs could result in "more severe conditions" than the ones stressed tested.

The BoE has also called on the UK and European Union to introduce legislation to avoid a post-Brexit crisis in the derivatives and insurance markets, according to the Financial Times.

The report said: "To preserve continuity of existing cross-border insurance and derivatives contracts, UK and EU legislation would be required.

"Six million UK policyholders, 30 million European Economic Area (EEA) policyholders, and around £26trn of outstanding uncleared derivatives contracts could otherwise be affected.

"HM Treasury is considering all options for mitigating risks to the continuity of outstanding cross-border financial services contracts."

Stress tests

In its latest stress testing of the UK banking system, Barclays and Royal Bank of Scotland performed the worst, despite the central bank finding the UK banking system overall was "resilient" to a recession worse than the Global Financial Crisis (GFC).

Although Barclays and RBS fell below the minimum capital level requirements in the stressed scenario, the BoE said the two banks had "significantly" improved their capital positions since the end of 2016.

In the stress test, RBS's capital ratio fell to 7%, below its 7.4% minimum requirement, while Barclays' fell to 7.4%, below its 7.9% requirement.

The other five banks tested were HSBC, Lloyds Banking Group, Standard Chartered, Santander UK and Nationwide, who all maintained their capital level above their respective minimum requirements.

This is the first time since the BoE began stress tests in 2014 that no bank needs to strengthen its capital position.

The report said: "Banks have continued to build their capital strength during 2017. As a result, the Prudential Regulation Committee (PRC) judged that all seven participating banks now have sufficient capital to meet the standard set by the test.

"The 2017 stress test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs."

Commenting on the stress test results, Laurent Frings, global head of credit research at Aberdeen Standard Investments, said: "The reality is that Brexit is the key risk today for the UK banking system. Leaving the EU is going to cause the UK banking sector all sorts of stresses that these tests just do not account for.

"Much of the uncertainty about the future relationship between the UK and Europe is expressed through the banks.

"Everything from macro-economic activity, asset quality issues, business issues from the future of passporting arrangements, through to levels of immigration will impact bank business models.

"UK banks are now much more focussed on the UK economy than they were in the past. That means that they are heavily exposed to UK consumers, which have been the great engine room of the economy for the past few years.

"Any Brexit-related slowdown in consumer spending is a big potential headache for the banks.

"Investors need to be mindful of how much comfort they take from the tests. They do account for consumer credit but they do not, and arguably cannot, take account for the risks posed by Brexit."