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Banks weather stress tests but Brexit uncertainty remains

UK banks have seen a marked improvement in their resilience under latest Bank of England Stress tests.

While Barclays and RBS failed the tests in a snapshot at the end of 2016, the Bank has announced that both had made improvements since then.

The Bank simulated scenarios including a third drop in house prices, an eight-fold increase in interest rates in just two years, and the unemployment rate doubling.

RBS admitted that stress test results were still “weaker than our long-term targets” as it looked to resolve “remaining major legacy conduct issues and non-core portfolio interests”.

The banks even survived a simulation of a disorderly Brexit. However, concerns were raised over the ability of EU offices to collect insurance premiums from the six million customers who buy insurance policies from them after leaving the EU.

Banks also buy and sell insurance products to each other, worth £26trn, which may be at risk without clear legislation.

Aberdeen Standard Investments global head of credit research Laurent Frings says: “The reality is that Brexit is the key risk today for the UK banking system. Leaving the EU is going to cause the UK banking sector all sorts of stresses that these tests just do not account for. Much of the uncertainty about the future relationship between the UK and Europe is expressed through the banks. Everything from macro-economic activity, asset quality issues, business issues from the future of passporting arrangements, through to levels of immigration will impact bank business models.”

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