MNI POLICY BOE: Banks Withstand Hardest Brexit; Rates Surge>

     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 

scenario. 

     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 

border. 

     -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 

Brexit. 

     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 

scenarios. 

     -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: david.robinson@marketnews.com  

[TOPICS: M$B$$$,M$$BE$,MABDS$]