The British banking system would survive the worst Brexit that would throw at it, according to comprehensive set of tests revealed by the Bank of England (BoE) on Wednesday.
A series of tests run on the major financial institutions operating in Britain earlier in the year were issued by the BoE’s financial sector regulator the Financial Policy Committee (FPC).
The results of the tests were contained in the FPC’s November Financial Stability Report (FSR) released late on Wednesday afternoon.
In the 2018 stress test the BoE modelled a British GDP fall of 4.75 percent, a rise in the jobless rate to 9.5 percent, a property price fall of 33 percent and a commercial property fall of 40 percent.
In addition, the model contained a 27 percent fall in the sterling rate and a rise in inflation to 4 percent, and a fall in global GDP of 2.4 percent.
The FSR said that for the first time since its inception in 2008 in the wake of the financial crisis, all seven financial institutions tested passed the test.
The stress test contained a global recession, making it a more severe strain on the British economy than the worst-case scenario of a Disorderly Brexit, details of which the BoE released earlier in the day.
BoE governor Mark Carney told journalists at a press conference to launch the FSR that Brexit was the biggest influence on economic prospects.
He said: “As today’s stress tests reveal, the core of our financial system is strong — major banks have capital ratios three and a half times higher than before the financial crisis.”
He added: “Based on a comparison with the 2018 stress test, the FPC judges that the UK banking system is strong enough to serve… in the event of a disorderly Brexit.”
The BoE expressed concern in the FSR at potential disruption that derivatives traders and UK central counterparties (CCPs) faced with uncertainty over the legal standing of outstanding derivatives trades and swaps which would mature after the formal Brexit date of March 29.
The BoE welcomed the European Commission’s recent statement that it is willing to act to ensure that EU counterparties can continue to clear their derivatives at UK CCPs after March 2019.
The BoE added: “However without greater clarity on the scope, conditions and timing of the prospective EU action, the contracts that EU members have cleared with UK CCPs would need to be closed out or transferred by March 2019.”
The FPC said it would retain its current countercyclical capital buffer (CCyB) at 1 percent, but would move the buffer up or down if necessary depending on Brexit circumstances.
The BoE last cut the CCyB in July 2016 to mitigate any bad reaction following the Brexit referendum vote, and said that a cut to 0 percent would give banks and financial institutions an additional 250 billion pounds (320 billion U.S. dollars) of leeway. (1 pound = 1.28 U.S. dollars)