A report simulates the Brexit of Chaos: The Bank of England presents a horror scenario

economy

Wednesday, November 28, 2018

The UK's central bank is recording a scenario of economic horror in a messy Brexit, including rising unemployment, the collapse of the currency and inflation. The financial structures of the country are, however, prepared for the emergency.

According to the Bank of England (BoE), a Brexit disorder could cause Britain's most severe recession since the Second World War. The UK economy is expected to shrink by eight percent from here a year without an agreement with the EU, the central bank writes in its report on the Brexit.

The unemployment rate will increase significantly given the slowdown in growth, according to the BoE. The central bank also expects strong reactions in the financial markets. Thus, the pound sterling should yield 25% of the US dollar. The substantial decline in the pound should bring the inflation rate to 6.5%. The central bank would then be forced to raise its key rates. In peak, the key rate could reach 5.5%.

According to the central bank, British financial institutions are also able to withstand a disordered exit from the EU country and a serious crisis caused by it. The UK banking system was strong enough to continue to provide households with sufficient credit, even in such a case, said the Bank of England in London. This has resulted in a test of resistance in the industry: "No bank should increase its capital buffer."

The test covered seven major financial institutions in the country, including major HSBC banks, Barclays, Royal Bank of Scotland, Standard Chartered and Lloyds. Britain wants to leave the EU in late March 2019. Whether with or without exit agreement is still open – the London parliament decides on December 11 of the treaty negotiated by Prime Minister Theresa May and criticized the contract of divorce with the EU. A "yes" MPs is not sure.

Simulation of the economic collapse

The Bank of England had simulated a marked slowdown in the UK and global economy during the health check of financial institutions. In addition, in the unfavorable scenario, bank failures resulted in high costs. In total, the fictitious capital loss of all controlled financial institutions amounted to 170 billion pounds, the central bank announced. However, the institutions were still able to lend even under the most difficult conditions. They also had enough liquid badets in the form of bonds and other securities to spend more than three months without access to their usual financing markets.

At Lloyds, the Common Equity Tier 1 (CET-1) – an important measure of a bank's resilience in a crisis – has fallen to 6.3% "under pressure" and no corrective action against the management of bank or capital reserves, at Barclays 6.9, HSBC at 5.8, Standard Chartered at 7.1 and Royal Bank of Scotland at 9.6%.

In addition to the major banks, the British subsidiary Banco Santander of Spain and the construction company Nationwide Building Society participated in the stress test. UK institutions outperformed the Barclays test in their home country against a semi-comparable physical condition check test from the European Banking Authority, EBA, whose results were published in early November. At that time, Barclays and Lloyds in particular were among the laggards among the 48 audited institutions in the European Union. Barclays' core capital ratio was then "under pressure" at 6.37% – so no other bank was closed. Lloyds rose to 6.8% in the stress test, HSBC at 9.18 and Royal Bank of Scotland at 9.92%.

Source: n-tv.de