UK banking system able to weather economy shrinking over a third, says BoE

The UK banking system is able to weather a severe economic storm, according to the Bank of England’s latest examination of the health of Britain’s biggest lenders.

The Bank said even in a scenario in which the British economy shrinks over a third and property prices plunge 33 per cent, the banking sector’s core capital ratio, a measure of the strength of a bank’s balance sheet, remains above the minimum threshold.

“Our latest stress test shows that the banking sector is resilient to even very challenging economic scenarios,” the Bank said.

All banks included in the latest assessment pass the Bank’s minimum capital ratio requirement of 7.6 per cent.

The sector’s overall capital ratio falls to a low of 10.5 per cent. 

The world’s largest lenders have been subjected to tougher regulations to avoid the pitfalls that triggered the global financial crisis in 2008.

As a result, UK banks have built up significant levels of capital buffers, meaning they are better prepared for sharp economic shocks.

The Old Lady’s latest stress test was significantly worse than forecasts set out in its monetary policy report.

The stress test included the UK economy shrinking 37 per cent over three years, UK residential and commercial property prices plummeting around 33 per cent and unemployment hitting 11.9 per cent.

British lenders were able to survive this scenario as a result of “a robust starting position… due to the build-up of capital since the global financial crisis, reflecting post-crisis reforms including higher capital requirements,” the Bank said.

More to follow.