Banks can survive Brexit horror show, says Bank of England

Threadneedle Street happy with latest stress tests, but two banks passed only through actions taken after the date at which its nightmare scenario was applied

The Bank of England is satisfied with results of its latest stress tests (AFP/Getty)

Every year the Bank of England’s Stephen Kings conjure an imaginary financial horror, a Nightmare on Elm Street that would make even the genre’s reigning monarch shiver.

And every year it follows that one of Britain’s banks finds its own personal Friday the Thirteenth, and ends up in a shallow grave as a result.

They then have to put their heads together with the Bank's regulatory gurus to find a way of digging themselves out.

This year’s imaginary scare resulted in something new: All the big lenders got a clean bill of health. For the first time since 2014, the Bank declared, none of the institutions covered have needed to strengthen their capital positions as a result of the test. Sort of.

You see, had the scare occurred at the end of the year - the position at which the tests were applied - two of them (RBS and Barclays) would have failed. They were given a passing grade because of actions they have taken since.

This is a spell one or another of the banks have to resort to casting every year. Some might consider it to be cheating, but it's the Bank that sets the rules and serves as referee, so perhaps not.

As some have also pointed out, this year the scenario was really nasty. The horror conjured by the bank’s dream weavers would have made even the one from Amityville blanch. It is worse even than what occurred during the 2007-2008 financial crisis.

World GDP falls by 2.4 per cent, UK GDP by 4.7 per cent, unemployment touches 9.5 per cent. The world wants nothing to do with UK assets. House prices crash by a third, commercial real estate by 40 per cent, base rates rise to 4 per cent as the pound falls by more than a quarter against an index of other major currencies.

With all this going on, banks incur losses of around £50bn in the first two years of stress. Relative to assets, a loss of that scale would have wiped out the capital base of the UK banking system ten years ago.

Now, according to the Threadneedle Street, “the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs”.

Armoured with capital crucifixes and systemic stakes, even the weaker ones (thanks to the indulgance of their lord and master) emerge bloodied but unbowed.

That’s particularly important now as a very real creature of nightmares emerges from the black lagoon. It's called Brexit.

The Bank has told its charges to boost their capital buffers by a further £6bn to protect against it, and no wonder because the approaching horror is no fictional creation. It is very, very real, and there will be no get out when it strikes. There will be no saying well we’d have failed on the date at which you wanted the tests applied but we’ve raised some capital since then so can we have a pass please?

Fortunately, thus armed Threadneedle Street thinks the industry can cope with the disorderly exit that looks increasingly likely as the crew of low rent pulp fiction writers elected to run the country hikes out to one of those deserted shacks that, as every cinema audience knows, scream run away, fast. Don’t even think about spending a night here.

Whether that’s true of the rest of us, including the walking dead who voted for the thing, remains an open question. The omens are anything but good.