The Bank of England Financial Stability Report issued today, says that the UK financial system is ready for Brexit – deal or no deal!
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The Financial Policy Committee (FPC) of the Bank of England, has today issued its latest Financial Stability Report and Record, in which it says that not only are our banks ready for a no deal Brexit, but also that they can cope with a US/China trade war and still keep serving the UK customer.
Specifically on Brexit, the Bank of England says that:
"The core of the UK financial system, including banks, dealers and insurance companies, is resilient to, and prepared for, the wide range of risks it could face, including a worst-case disorderly Brexit."
And it goes on to say that the UK banking system is strong enough to keep on lending throughout any Brexit related economic and financial shocks.
One comment it does make is that:
"The perceived likelihood of a no-deal Brexit has increased since the start of the year."
Which some people are latching on to and interpreting as the Bank saying that a no deal is more likely.
But, it might mean that the Bank thinks more people are now catching on to the possibility of a no deal, although the level of likelihood of a no deal may not have changed.
Now the Bank says that the stress test it conducted on the banking system in 2018 was more severe than the 2007 Credit Crunch and that even after this the banks would have more capital than they did in 2007.
On this the FPC says that it "…continues to judge that its 2018 stress test of major UK banks was sufficiently severe to encompass the wide range of UK economic and financial shocks that could be associated with Brexit. Overall, the stress scenario was more severe than the global financial crisis."
And the FPC goes on to say that the banks rose to the challenge and now maintain Tier 1 capital levels at more than three times higher than before the global financial crisis.
The stress test worst case scenario showed the system could cope with the UK economy shrinking by 4.7%, unemployment rising to 9.5%, double what it is now, property prices being slashed by 33% and global GDP falling by 2.4%.
But one point to note, which is a recurring theme in these reports.
The UK has taken action to deal with the biggest risks of disruption for people in the UK.
But there will still be disruption for those in the EU, which could have a knock on effect in market volatility.
On this the Bank says:
"…..in the absence of further action by EU authorities, some disruption to cross-border financial services is possible. Although such disruption would primarily affect EU households and businesses, it could amplify volatility and spill back to the UK in ways that cannot be fully anticipated or mitigated."
Now, although the financial system is ready to provide financial stability, the Bank is at pains to point out that financial stability is not the same as market stability.
And on a no deal Brexit the Bank says:
"….a range of UK asset prices – including the sterling exchange rate, equities, corporate and government debt and bank funding costs – would be expected to adjust sharply, tightening financial conditions for UK households and businesses."
Now, surely the markets would be adjusting in the run up to Brexit Day as events unfold so as to 'price-in' any perceived risks? Investors are always looking ahead and trying to see in which shares, bonds, commodities and currencies etc they should put their money in, to either get the best return or mitigate risk.
And a lot depends therefore on market sentiment reacting to such things as government actions and statements to maintain market confidence.
So anything that keeps business flowing and the legal position certain will be seen as a good thing by investors. As will any action taken to identify, open up and exploit new post Brexit opportunities.
But all that we've heard thus far, is the constant rattling of chains and the tolling of the Project Fear bell.
Let's just hope that with a new PM in place in a couple of weeks time we start seeing some confidence and real preparations to leave the EU – whatever!