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UK banks ready for Armageddon-style meltdown, says Bank of England

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·Senior Economics Correspondent at Yahoo Finance UK
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London’s Canary Wharf is home to a range of UK and international banks. Photo: Oli Scarff/Getty Images
London’s Canary Wharf is home to a range of UK and international banks. Photo: Oli Scarff/Getty Images

UK banks are ready for an Armageddon-style meltdown, including a messy Brexit, a simultaneous global downturn and a market crash, according to new stress tests by the UK’s central bank.

The Bank of England (BoE) published its report on Wednesday after the markets closed for the day, alongside two other reports covering Brexit and UK financial stability.

The fifth annual bank stress test analysed the following seven UK-based giants: Lloyds Banking Group (LLOY.L), Barclays (BARC.L), Royal Bank of Scotland (RBS.L), HSBC (HSBA.L), Santander UK (SAN.MC), Nationwide Building Society and Standard Chartered (STAN.L).

This test showed UK banks have increased their key cash reserves by 3.5 times compared to their pre-financial crisis levels, giving all of the banks a large cash cushion to fall back on in case things fall apart.

READ MORE: No-deal Brexit could hit UK worse than financial crisis, warns BoE

The latest stress test scenario was more severe than the financial crisis 10 years ago and included a 33% drop in UK house prices and a sharp increase in Britain’s unemployment rate to 9.5%, along with a global economic meltdown.

BoE governor Mark Carney has repeatedly stressed that the UK’s financial sector is resilient, though he has warned that the central bank will not be able to fully rescue the economy if the UK crashes out of the European Union in March 2019 with no EU deal.

Expectations for Brexit

The BoE’s additional report about Brexit – issued at the same time – outlined that if the UK were to leave the EU in March 2019 with no deal and no transition period, economic growth could drop by roughly 8% within a year.

The BoE reports come just hours after Britain’s government issued a separate report warning that a no-deal Brexit would lead to a dramatic slowdown of the economy over the next 15 years.

The government warned that a no-deal Brexit would leave the UK economy about 9.3% smaller in the next 15 years compared to a scenario where the UK remained in the EU. The government analysis considered that under this scenario, there would be tightly restricted flows of European immigrants and higher trading costs with the EU.

The other government scenario – roughly in line with May’s Brexit deal for the UK – is also a significant economic downgrade, but the shock would be less severe. The government anticipates the economy would be about 3.9% smaller in 15 years’ time under May’s plan, compared with a no-Brexit scenario.

Politics in play

Prime minister Theresa May is struggling to convince the majority of members of parliament to approve her Brexit deal with the EU in a vote scheduled for 11 December. If MPs don’t approve the deal, it raises the risk that the UK could be forced to brace for a no-deal, cliff-edge Brexit next year.

May’s deal includes the terms of the UK’s divorce, along with an outline of plans for the future relationship between the EU and UK. It also includes plans for a transition period until at least the end of 2020, to allow businesses and consumers to adjust. But a transition period is not a sure thing until the UK ratifies the deal.

With files from Reuters and the Press Association

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