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The BoE said that Britain’s EU referendum in June represents “the most significant near-term domestic risk to financial stability”.
But it added that the banking sector was strong enough to withstand a severe shock and still lend to households and businesses.
Banks are being asked to clear a higher bar in this year’s stress tests, which model a deeper shock to the global economy than the past two exercises and for the first time formally include two extra capital buffers in the overall requirements for banks.
The BoE warned that the UK’s high current account deficit left it vulnerable to a Brexit vote, which could trigger a rise in borrowing costs for the government, businesses and households. It added that borrowing costs could also rise in the eurozone with a knock-on effect on UK growth.
“Heightened and prolonged uncertainty has the potential to increase the risk premia investors require on a wide range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers,” the BoE said in a statement from its Financial Policy Committee.
The BoE has said it will offer three extra funding options to provide banks with extra liquidity in the weeks around the EU referendum on June 23.
This year’s stress tests of the UK’s biggest banks, of which the results will be published in the fourth quarter, model an almost 8 per cent negative impact on global economic growth, a deeper shock than either of the past two exercises.
The BoE will also raise the minimum capital levels that banks must maintain in stressed conditions by including so-called Pillar 2A buffers, which are set on a bank-by-bank basis by the regulator.
It will also include an extra capital buffer that groups considered to be global systemically important banks must meet under Financial Stability Board rules that come into force for the world’s biggest banks by 2019.
This will raise the minimum capital levels for the biggest UK banks in this year’s stress test from 4.5 per cent to between 7 and 8 per cent.
However, officials at the BoE do not expect the stress tests to increase overall capital requirements for banks, because they already took the two extra buffers into account and most have already reduced the riskiness of their business models. [...]
Full article on Financial Times (subscription required)