UK banks are prepared to withstand more than just Brexit, according to Bank of England Governor Mark Carney.
Stress tests conducted by the central bank show Britain’s financial system would still have more than adequate capital to maintain lending in the face of multiple headwinds, Carney said in a speech in New York. The bank has been “preparing for the worst” outcome to the UK’s negotiations, including improving liquidity, building capital buffers and planning or disruption to cross-border derivative contracts.
“We judge that the UK banking system has the capacity to absorb not only the consequences of a no-deal, no-transition Brexit, but also the losses that could be associated with intensifying trade tensions, a further sharp tightening of fina- ncing conditions for emerging markets, and substantial additional misconduct costs,” he said.
Carney also reiterated his call for European Union officials to address financial risks related to Brexit. Echoing warnings made by the BOE’s Financial Policy Committee last week, he said that the bloc has only made “limited progress” thus far, and “timely action by EU authorities is needed to mitigate risks to financial stability, particularly those associated with derivative contracts and the transfer of personal data.”
Stress tests conducted last year required banks to withstand, among other things, a 4.5 percent drop in gross domestic product, house prices plunging by a third and unemployment at 9.5 percent. The scenarios involved in the tests are “severe but plausible,” Carney said.
Carney laid out a similar scenario to UK Cabinet last month as part of ministers’ preparations for a no-deal Brexit. In a letter to Nicky Morgan, chair of the Treasury Committee, Carney said he was discussing hypothetical situations in the meeting, and they were “not pred- ictions of what is most likely to happen, but rather estimates of worst-case scenarios however unlikely they may be.”