UK output plummets by 4.7 percent in the first year of the 2017 stress test of seven UK banks, including HSBC Holdings and Barclays. The health check’s adverse scenario also foresees a 32 percent decline of the pound against the dollar and a 5 percent inflation rate by end-2018.
While the BOE didn’t target Brexit by name in the stress-test scenarios published yesterday, it said risks to financial stability will be influenced by the orderliness of that process. Banks have also been asked to submit their post-Brexit contingency plans to the regulator for approval.
Prime Minister Theresa May plans to trigger departure talks tomorrow in a letter to other EU leaders.
The other lenders covered by this year’s test are Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland Group, Santander UK and Standard Chartered.
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The seven firms account for about 80 percent of the outstanding stock of lending by banks supervised by the BOE’s Prudential Regulation Authority.
This year’s macro-economic stress test spans the five years to 2021. It reflects the BOE’s judgment that global risks are “elevated and have increased somewhat over the last year”, while “underlying domestic vulnerabilities” are “broadly unchanged” from last year’s exercise.
This means the peak-to-trough decline in global gross domestic product is minus 2.4 percent in this year’s test. While the UK contraction is slightly more severe than in the 2016 test, the impact on unemployment is the same - a rise to 9.5 percent.
Without delving into Brexit explicitly, the BOE did note that the resilience of the UK financial system depends in part on standards applied elsewhere.
The BOE said standards in other jurisdictions should “at a minimum” be “consistent with agreed common international baseline standards”.
The 2017 stress test is the first to feature an “exploratory” scenario in addition to the annual cyclical scenario. The new element is designed to assess the resilience of the system to risks that may not be “neatly linked” to the financial cycle, according to the BOE.
Results of the annual test will be published in the fourth quarter. Those of the exploratory check will be provided only in aggregate form.