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By David Robinson and Jai Lakhani
LONDON (MNI) - The Bank of England published the results of its
bank Stress Tests and its Brexit scenario analysis. It highlighted how
hard the economy would be hit by a disorderly Brexit but judged that
banks were well placed to withstand even this worst case Brexit
The following are the key points from the BOE analysis:
-The BOE Financial Policy Committee concluded that the major UK
banks "have levels of capital and liquidity to withstand even a severe
economic shock that could be associated with a disorderly Brexit."
A disorderly Brexit is defined as one with no deal and no
transition period, where UK/EU trade stalls with disruption at the
-Crucially for monetary policy, the BOE assumes that Brexit in any
form is primarily a supply shock, which brings in its wake a hit to
demand. In all scenarios Bank Rate is assumed to rise from its current
0.75% level, only gently in a relatively benign Brexit while peaking at
5.5% in the disorderly scenario.
-In the worst case, disorderly, Brexit scenario, UK GDP was assumed
to fall 8% from peak-to-trough and the unemployment rate to rise to
7.5%. The impact on the currency is eye watering, with the exchange rate
falling 25% and ending up below parity against the US Dollar.
-The stress tests were based on a synchronised global recession, a
scenario that would be markedly tougher for UK banks than a disorderly
Even though UK GDP falls slightly less rapidly than in the most
disorderly Brexit scenario the hit to UK banks is much larger, primarily
because around half of their business comes for overseas. The impact
from Brexit, a local supply shock, poses less of a risk to the UK banks
and under all scenarios the BOE assessment was they remained resilient.
-Away from the worst case, tail-risk, scenarios for Brexit used to
assess financial stability, the BOE also published its analysis of a
"Close Economic Partnership" with the EU.
This approximates to the type of deal the government is angling for
if it gets parliamentary approval for the withdrawal agreement. Under
this scenario there is free trade in goods and some free trade in
business and financial services. GDP after five years could, at the top
of the range, be 1.75% higher relative to the estimate in the November
2018 Inflation Report - which was conditioned on an average of Brexit
-In a "Less Close Economic Partnership", under which customs checks
and greater regulatory barriers to trade exist, GDP would be -0.75%
below the November 2018 inflation report forecast for 2023.
-In recent days other economic bodies have published detailed
projections of the likely impact of various Brexit scenarios.
The National Institute of Economic and Social Research said that
its central scenario was that "if the government's proposed Brexit deal
is implemented, then GDP in the longer term will be around 4 per cent
lower than it would have been had the UK stayed in the EU."
The Government Economic Service modelled various assumptions, and
concluded that over 15 years a no deal scenario could see GDP 7.7% lower
while something close to the deal could result in a 3.9% hit to GDP.
-London newsroom: e-mail: email@example.com