BOE FPC: UK Banks Could Deal With Disorderly Brexit>

     LONDON (MNI) - The Bank of England subjected UK banks to stress 

tests based on a string of adverse economic developments and concluded 

that all of them had strong enough capital positions to withstand them. 

     The BOE reckoned that the banks' capital positions were strong 

enough to withstand even a disorderly Brexit. Whatever form a disorderly 

Brexit took the Bank reckoned it was very unlikely to result in more 

adverse trading conditions than those factored into the stress tests.  

     Since the Bank launched its annual stress tests in 2014 this was 

the first time that it decided no bank needed to strengthen its capital 

position. Two banks, RBS and Barclays, narrowly failed the stress tests 

based on their end 2016 capital positions but both have subsequently 

strengthened their positions, ensuring they meet the tests. 

     The stress tests assess whether banks' key capital ratio, the CET1 

capital ratio, stays above 8% in the face of a string of economic 

shocks. 

     Based on end 2016 balance sheets the banks started with an 

aggregate 13.4% CET1 ratio and ended the stress tests with an 8.3% 

ratio. 

     While Barclays and RBS CET1 ratios dipped below 7% their subsequent 

strengthening of their capital position meant that their ratios would 

stay above 8.0% if the tests were re-run. 

     Among the stress tests criteria were UK GDP falling by 4.7%, 

unemployment rising to 9.5%, Bank Rate rising from its current 0.5% to 

4.0% and banks being hit by a swathe of further misconduct fines. 

     The BOE Financial Policy Committee said that the stress tests 

showed that "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." 

     The FPC noted that the adverse conditions embodied in the stress 

tests were more severe than in the global financial crisis. While no-one 

knows precisely what the ramifications of a disorderly Brexit would be, 

the FPC assumed that they would not be worse than the outcomes assumed 

in the stress tests. 

     The BOE is going to carry out further work, however, to see if UK 

banks could withstand severe macro-economic shocks in addition to a 

disorderly Brexit. 

     "The combination of a disorderly Brexit and a severe global 

recession and stressed misconduct costs could result in more severe 

conditions than in the stress tests," the FPC said. 

     In order to lock-in the improvement in banks capital position, the 

FPC announced that it was raising the counter cyclical capital buffer 

from 0.5% to 1.0% from November 2018 and will look again at whether to 

raise the CCyB in the first half of next year.   

     The FPC reckoned that the UK was in a normal risk environment 

absent Brexit. The Monetary Policy Committee has been setting policy on 

the grounds that circumstances are exceptional and the FPC assumption 

makes clear that this is now solely due to Brexit. 

     The FPC also pulled together work on household indebtedness and 

concluded that it was less marked before the global financial crisis 

hit. 

     It noted that while the proportion of households with high 

debt-to-income (DTI) ratios had risen recently it was still below 

pre-crisis peaks. Around 3.4% of households had DTI ratios of 4% or 

above. 

     The proportion of households with high debt-to-service ratios, of 

40% or above, was close to its all time low. 

     "Recent survey data suggest household balance sheets have started 

to deteriorate somewhat ... but these measures remain some way from 

previous peaks," the FPC concluded. 

-London newsroom: Tel+44 203 856 2226; email: 

jamie.satchithanantham@marketnews.com; david.robinson@marketnews.com 

[TOPICS: M$$BE$,MT$$$$]