The Bank of England has said Britain’s lenders could withstand the worst case no-deal Brexit and a full-scale global trade war but warned “material risks of economic disruption” remain from a cliff-edge EU withdrawal.
In the latest report from the Financial Policy Committee (FPC), the Bank said it had assessed lenders against a doomsday no-deal Brexit scenario together with a global slowdown sparked by the US-China trade war and found they would still be able to continue lending to UK households and businesses.
But Governor Mark Carney cautioned that Britain would still suffer a “major economic shock” if it crashed out of the EU, adding that the threat of a no-deal had increased in recent months.
He said while the Government had made progress in preparing for a no-deal, it still had work to do, while there was also significant action needed on the part of EU authorities.
But Mr Carney stressed the UK financial system was “ready for Brexit whatever form it takes”.
He added: “Brexit developments are taking place against a backdrop of increasing risk to the global economic outlook.”
He said: “Even if a protectionist-driven global slowdown were to spill over to the UK at the same time as a worst-case disorderly Brexit, the FPC judges the core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks.”
The FPC cautioned that EU authorities still needed to take further action to help protect against some risks that remain, particularly ensuring banking services between UK and EU banks can remain in place after EU withdrawal.
It said half of all clients of major UK banks had not completed the necessary paperwork for EU derivative trades.
The lack of action by the EU is likely to largely affect European households and businesses, but could be expected to spill back to the UK.
The Brexit threat comes at a time of mounting trade tensions between the US and China, which the FPC said have “resulted in declining business confidence and pose material downside risks to global growth output”.
UK banks are around 60% exposed to the international economy.
In its assessment of UK bank strength, the Bank said it assumed the worst case no-deal Brexit outcome, as well as a trade war outcome that saw the US and China ramp up their tariffs by 25%, as well as a sharp contraction in global growth.
The FPC said it was satisfied that its most recent stress test at the end of 2018 was tougher even than this outcome and that banks would withstand the double-whammy hit.
The report also revealed the Bank is launching a review of funds like Neil Woodford’s suspended equity income fund, which has left hundreds of thousands of investors locked out of their cash.
The Bank will look at potentially imposing restrictions that could ban funds invested in illiquid assets from offering short-term notice periods.
At a press conference after the FPC report, Mr Carney declined to confirm whether he plans to apply for the post of head of the International Monetary Fund to succeed Christine Lagarde.
Mr Carney said: “There will come a time when that (recruitment) process launches and it’s probably the right time to answer that question.”
The Bank also confirmed in its FPC report that it plans to test UK lenders for the first time against climate change risks in its annual health check of the sector from 2021.