The Bank of England has asked UK banks, insurers and other financial institutions to draw up comprehensive plans for how they will deal with Britain’s exit from the European Union, and will scrutinise them closely.
Two days before Theresa May’s government plans to trigger article 50 and begin two years of negotiation over the UK’s departure, the Bank said City institutions would have to provide copies of contingency plans to reassure regulators that they were ready for “a range of possible outcomes”.
The Bank’s financial policy committee (FPC) said after its last quarterly meeting: “Risks to financial stability will be influenced by the orderliness of the adjustment to the new relationship between the UK and EU. The FPC will oversee contingency plans to mitigate risks to financial stability as the process unfolds.”
The Bank’s governor, Mark Carney, said in January that the UK’s departure from the EU was no longer seen as the biggest domestic threat to British financial stability compared with a year ago, though he added that Brexit could amplify some of the domestic risks.
The FPC highlighted rapid growth in UK consumer credit and “elevated” global risks, mainly due to rising debt levels in China, as the main threats to Britain’s banking system. The central bank launched a review into the credit quality of new lending – underwriting standards and the risk models used by banks – and said it would scrutinise these findings over the coming months.
Banks also face a new, tougher, longer-term test of their financial resilience as part of the FPC’s annual health check of the UK banking system, the outcome of which is expected to be published at the end of November.
UK household borrowings were high by past standards and had begun to rise in relation to incomes, the FPC said. Consumer credit – the single largest slice of UK banks’ balance sheets – has been growing rapidly, by more than 10% year-on-year, initially driven by car finance, the Bank warned.
Last year banks had £19bn of impairments on credit cards, compared with £12bn on mortgage loans. Consumer credit now poses a greater risk than buy-to-let lending to landlords, which has cooled over the past year. Risks from Britain’s commercial property sector have also been reduced after a fall in prices, the FPC said.
The Bank’s stress tests on seven leading lenders this year will for the first time include an exploratory scenario that will examine banks’ resilience over seven years of weak global growth, low interest rates and high legal costs and fines for misconduct, and look at the viability of their business models.
It will be conducted every other year, in addition to the regular annual stress test, which puts banks through another hypothetical scenario that tests their ability to weather a severe economic shock over a five-year period.
Last year Royal Bank of Scotland, which is 73% owned by UK taxpayers, was the biggest failure in the stress tests, while Barclays and Standard Chartered also struggled.
