The UK’s seven biggest lenders are all strong enough to cope with a “disorderly” no-deal Brexit, according to a Bank of England assessment.
But the Bank said it would need to consider whether the firms will need to make sure they hold billions more capital in case such a scenario coincides with a wider global downturn.
The Bank’s Financial Policy Committee also set out a wishlist of actions it says need to be taken to try to mitigate the risks to UK financial services posed by the departure from the EU.
Stress tests based on a severe economic scenario were carried out on Lloyds Banking Group, HSBC, Barclays, Royal Bank of Scotland, Santander UK, Standard Chartered and Nationwide.
They modelled a nightmare scenario under which UK GDP slumps by 4.7% amid a wider global downturn, unemployment rises to 9.5%, the pound plunges and the Bank’s interest rate climbs to 4%.
Image: Barclays and six other banks carried out stress tests
The test works out how much the level of capital held by each lender would fall.
It found that, based on 2016 numbers, Barclays and Royal Bank of Scotland would fall short of the required levels set for them, though asset sales they have carried out in the months since meant they now met targets.
That meant that for the first time since stress tests began 2014, no bank has been told that it needs to strengthen its capital position by the Bank.
Tests were put in place in the aftermath of the 2008 financial crisis to try to ensure that, should another sharp downturn occur, lending would not seize up, accentuating the difficulties faced by the wider economy.
The Bank said the latest scenario would mean banks incurring losses of £50bn over two years – a level that would, a decade ago, have wiped out their capital base.
Video: Govt plans Brexit economy boost
The stress test was published together with the FPC’s biannual Financial Stability Report.
The FPC confirmed that it was raising the so-called “countercyclical buffer” – a back stop that can be held by lenders so that it can be released at a time of economic stress – from 0.5% to 1%, continuing a normalisation after it was cut to zero following the Brexit vote.
That 1% level establishes an emergency buffer for the UK financial system of £11.4bn.
But the FPC acknowledged that in the first half of next year it would need to consider lifting this “in the light of the overall risk environment”.
“The FPC judges the UK banking system could continue to support the real economy through a disorderly Brexit,” it said.
“However, 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 test.
Video: Carney: Interest rate rise is ‘a good news story’
“In such circumstances, capital buffers would need to be drawn down substantially more than in the stress test and, as a result, banks would be more likely to restrict lending to the real economy.”
The Bank also called for a series of measures to try to mitigate the “risks of disruption to UK financial services arising from Brexit”.
These included ensuring that the right UK legal and regulatory framework was in place, and ensuring a “timely agreement” for a transition period – echoing calls previously made by Bank officials and the City though not giving a timeframe.
It also said legislation in both the UK and EU was needed to protect cross-border insurance policies affecting six million UK policy holders and 30 million in the EU, as well as £26tn of derivatives contracts, that could otherwise be affected.
Meanwhile, the Bank will set out plans by the end of this year on licencing European banks to continue operating in the UK after Brexit.