The Bank of England (BoE) has released a report stating that the UK banking system is capable of withstanding a more severe economic downturn than the 2008 financial crisis. This news will likely reassure British businesses and households who are concerned about rising interest rates and high inflation.
According to the results of the stress test conducted by the BoE, the largest banks in the UK have built up resilience in recent years and can withstand economic shocks such as deep recessions and significant drops in asset prices. Despite the current inflation rate of 8.7 percent, which is much higher than the government’s target of 2 percent, the banks are prepared for the challenges.
The stress test scenario assumed an unemployment rate of 8.5 percent, inflation rising to 17 percent, and a 31 percent decrease in house prices. Eight major UK banks, including Barclays, HSBC, Lloyds, and NatWest, were analyzed as part of the stress test. The BoE stated that these banks have strong capital and liquidity positions, increased profitability, and the ability to support their customers.
While the recent increase in interest rates to 5 percent may result in higher mortgage payments for households and businesses, the stress test showed that the UK’s largest banks can still provide support to families and businesses. The banks have accumulated significant capital buffers and can absorb losses, reducing the risk of defaults among borrowers.
Furthermore, homeowners with mortgages provided by signatories to the government’s Mortgage Charter will have the option to stay in their homes for a year after the first missed payment. The government acknowledges the impact of high inflation and increased interest rates on British households and has allocated significant support packages to assist them.
The BoE has decided to maintain its counter-cyclical capital buffer (CCyB) for banks unchanged. This buffer is designed to mitigate fluctuations in financial variables during an economic cycle. Individual bank results showed that no bank needs to strengthen its capital position. The passing grade for the banks’ capital measurement, known as the common equity tier one ratio (CET1), was set at 6.9 percent.
Overall, the stress test demonstrated that major UK banks are resilient enough to continue serving the real economy even in the face of severe global macroeconomic stress.