Brexit may make BOE ramp up buffer for UK’s banks again

Bloomberg

The Bank of England may increase a key financial safety measure for a third time because it’s worried that a combination of a disorderly Brexit and a global recession could be enough to put the brakes on lending.
The central bank is going ahead with a planned increase in the countercyclical capital buffer to 1 percent from 0.5 percent, and said on Tuesday it will review the level again early next year, citing the “overall risk environment.” It also revealed that all UK lenders passed stress tests for the first time since it started the annual exercise.
However, Barclays Plc and Royal Bank of Scotland Group Plc were the weakest of the seven major UK banks in the exercise, although they were not ordered to raise any additional capital or change their strategies in light of actions they’ve made since the end of last year. Both fell below their systemic reference point, a higher threshold that reflects their global significance.
“Until we have resolved our remaining major legacy conduct issues and non-core portfolio interests, we will continue to show stress test results weaker than our long term targets,” said RBS Chief Financial Officer Ewen Stevenson in a statement following the results. Barclays said the results reflect “litigation and conduct issues” which the bank is aiming to resolve.
HSBC Holdings Plc, Lloyds Banking Group Plc, Nationwide Building Society, Santander UK Plc and Standard Chartered Plc all passed the health check, which was based on end-2016 data. Barclays fell 0.2 percent to 187.05 pence and RBS rose 0.6 percent to 269.3 pence at 8:16 a.m. in London trading, while Lloyds dipped 0.4 percent to 65.25 pence. Combined, the seven lenders would incur losses of about 50 billion pounds ($66 billion) in the stress scenario, a level that “would have wiped out” their common equity capital a decade ago. All banks stop paying dividends, bonuses and additional Tier 1 debt coupons under the scenario.
The latest buffer increase — to take effect in November 2018 — will cost banks about 6 billion pounds, though they have the resources and won’t have to raise money from shareholders.
The 2017 stress tests included UK and global economic slumps, a record house-price drop and a plunge in sterling. The BOE’s Financial Policy Committee said even in that scenario, banks are resilient enough to keep lending to consumers and businesses, based on current capital and leverage levels.
“However, the combination of a disorderly Brexit and a severe global recession and stress misconduct costs could result in more severe conditions than in the stress test, “ it said.
“In such circumstances, capital buffers would be drawn down substantially more.”
The FPC, led by Governor Mark Carney, said it’s continuing to assess threats to financial serv-
ices related to the withdrawal from the European Union. It warned it will be difficult for institutions to fully mitigate risks on their own and “timely agreement on an implementation
period” would help.

Carney warns of economic pain if Brexit can’t be smoothed
Bloomberg

Mark Carney doubled down on his warning that anything less than a smooth Brexit transition risks wreaking financial disruption and economic pain. The Bank of England governor used a press conference after the results of bank stress tests on Tuesday to call for a handover period as the UK leaves the European Union, and
said lenders will need at least 18-24 months.
“We have been reviewing the contingency plans, transition plans of all the financial institutions based here, both outbound and inbound if you will, and I would say that the 24 months period remains a good estimate given where we are today. The timing of achieving a transition agreement — the sooner the better.”