Biggest banks pass financial stress test

A new report by The Bank of England (BoE) says that Britain’s financial system is healthy enough to withstand a deep recession.

The report found that major UK banks are strong enough to keep supporting households and businesses, even in severe scenarios. The Bank’s annual stress test found that the country’s eight biggest lenders would not see their levels of capital drop to dangerous levels, even in a scenario where unemployment climbed to 12% and house prices crashed by 33%.

Releasing the findings, the BoE said it would raise the capital requirements for UK banks next year, with the Bank also consulting on loosening affordability limits on mortgages. It also warned that it was monitoring the increasing use and popularity of cryptocurrencies. Noting that the direct risks to the stability of the UK financial system from cryptoassets are currently limited, the Financial Policy Committee (FPC) said at the current rapid pace of growth, and as these assets become more interconnected with the wider financial system, cryptoassets will present a number of financial stability risks.

BOE Governor Andrew Bailey said “The system can withstand a stress that’s much larger than the stress we’ve seen so far, The pandemic could still have a greater impact on the economy, especially in light of new variants.”

Paul Broadhead, Head of Mortgage and Housing Policy at the BSA said “We welcome the Financial Policy Committee’s intention to withdraw the affordability stress test for new mortgages. This measure mainly impacts certain borrowers, such as first-time buyers and those looking to buy in the South East, who can clearly afford a mortgage but are hindered by the requirement to test that they could still pay their mortgage if rates were in the region of 6%+.”

“Lenders will continue to check that a mortgage is affordable both now and if interest rates increase in line with market expectations.”