Bank of England warns no-deal Brexit now more likely

Mark Johnson's picture
by Mark Johnson

The Bank of England has said in its half year Financial Stability Report, out today, that the likelihood of a no-deal has increased since the start of the year.

Britain’s central bank also said that the core of the UK financial system, including banks, dealers and insurance companies, is resilient to, and prepared for, the wide range of risks it could face, including a worst-case disorderly Brexit.   

“The perceived likelihood of a no-deal Brexit has increased since the start of the year”, the Bank’s Financial Policy Committee said. 

Increased Brexit uncertainties have put additional downward pressure on UK forward interest rates and led to a decline in the sterling exchange rate and an underperformance of UK-focused equities. 

Foreign investors declining 

In markets that are particularly dependent on foreign investors – notably commercial real estate and leveraged lending - investment into the UK was much weaker in 2019 Q1 than in recent years.  

The UK banking system remains strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit.

Companies better prepared 

The BoE noted that actions by businesses and authorities since November have resulted in some improvement in the preparedness of the UK economy for a no-deal Brexit. However, material risks of economic disruption remain.

“The FPC continues to judge that its 2018 stress test of major UK banks was sufficiently severe to encompass the wide range of UK economic and financial shocks that could be associated with Brexit”, the FPC said. “Overall, the stress scenario was more severe than the global financial crisis.” 

Major UK banks demonstrated their resilience to that stress scenario. Since the stress test they have maintained Tier 1 capital levels of around 17% of risk-weighted assets – more than three times higher than before the global financial crisis.

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