MNI ANALYSIS: BOE Sees Banks Staying Safe In Disorderly Brexit

-BOE Financial Stability Report, Stress Tests Will Highlight Resilience

-BOE Brexit Scenarios Won't Contain Point Forecast Of Brexit Deal Impact

By David Robinson

     LONDON (MNI) - The Bank of England is set to offer reassurances that the

UK's banking system will be resilient enough to withstand even the most chaotic

of Brexits, while declining to provide precise forecasts of the likely economic

impact of various Brexit scenarios.

     The BOE will issue its annual bank stress tests and quarterly Financial

Stability Report on Nov. 28 and the day after will send the Treasury Committee

its Brexit scenario analysis. The stress tests will show that banks are strong

enough to withstand even an extreme recession while the scenarios will explore

plausible Brexit outturns without attaching any headline-grabbing point

estimates to them.

     --BANKS CAN SURVIVE WORSE THAN WORST BREXIT

     The 2018 stress test, assessing major banks' ability to withstand an

extreme economic shock, is based on a hard landing in China, with world GDP

falling by 2.4% from start-to-trough, UK GDP sinking by 4.7% and unemployment

peaking at 9.5%. It foresees the Monetary Policy Committee hiking Bank Rate to

4.0% from its current 0.75%.

     The BOE's Financial Policy Committee has constructed a severe adverse

Brexit outcome and no plausible economic hit from that would be more severe than

the central scenario in the stress tests. The FPC will almost inevitably

conclude by repeating its line that it "continues to judge that the UK banking

system could support the real economy through a disorderly Brexit."

     Asked about Brexit-related financial stability risks at Tuesday's Treasury

Committee hearing, BOE Governor Mark Carney said "The question is whether the

financial sector is part of the problem or an element of the solution, whether

it amplifies or somewhat dampens the shock. We think we have put it in a

position ... where it would dampen and be there for the real economy."

     While banks appear to be strong enough to withstand a disorderly Brexit, if

the UK crashes out with no deal in March 2019 it would create other headaches

for the BOE. One problem is ensuring the continuity of existing cross-border

derivative contracts, with the EU authorities yet to match the UK offer of a

temporary permissions regime that would allow them to be serviced.

     Clearing houses too need certainty over whether members will be authorized

to meet their obligations

     There are glimmers of light, however, with the joint working body set up

between ECB head Mario Draghi and Carney helping focus attention on coming up

with measures to deal with the risks.

     "We are on a path towards greater legal certainty but they (the clearing

houses) do not yet have clarity," Carney said.

     --FUZZY SCENARIOS

     The stress tests and Financial Stability Report will feed into the scenario

analysis that the MPC will give to the cross-party Treasury Committee.

     Any lawmakers looking for punchy point estimates of the likely economic

effect of implementing the withdrawal will be disappointed, although the MPC

will doubtless highlight the potentially high costs of no deal.

     The future relationship set out in the UK-EU withdrawal agreement and

associated political declaration covers "a spectrum of different outcomes," from

a customs union to a more arms length free trade scenario, and its vagueness

justifies the MPC's desire to avoid putting spuriously precise numbers on its

economic impact.

     Carney told the Treasury committee that the MPC would provide "a scenario

related to the withdrawal agreement ... as opposed to a full forecast" because

the political declaration covers "a range of potential outcomes."

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]