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BoE: All seven banks passed the stress test - BBH

Analysts at BBH note that unlike last year, this year's BOE stress test saw all seven banks pass and the BOE also went forward with increasing the counter-cyclical buffer the large banks are to hold from 0.5% to 1.0%.  

Key Quotes

“It is effective next November.  It may also not be capped there; the BOE said it would review the level again next year.  The 0.5% increase costs about GBP6 bln.”  

“While the BOE said that the stress tests demonstrate that UK banks can withstand a disorderly exit, it acknowledged that there would be economic costs if Brexit is not smooth.  This was also the gist of the OECD assessment in its semi-annual report.  The OECD's new global outlook warned that the UK economy would continue to slow in 2018 and 2019 and that uncertainty around Brexit is the main threat to the outlook.  One of the implications is that the rate hike that was delivered in September is unlikely to be repeated unless conditions change.”  

“There was an area of concern that drew BOE attention.  It warned that UK financial firms might be constrained from servicing an estimated GBP26 trln of outstanding (OTC) derivative contracts.  The BOE said that about 25% of these positions involve a UK and EU entities.  Each contract will require renegotiation and cautioned that there were no precedents for such an undertaking in eighteen months.”  

“Meanwhile, the Brexit negotiations may become even more difficult if the Irish government collapses.  There is a no-confidence vote on the Deputy Prime Minister scheduled for tonight in Ireland.  The latest email revelations suggest Fitzgerald may have known more about the potential legal strategy of discrediting the police whistleblower that has been acknowledged.  If a new election is necessary, it would likely be next month.  During this time, there will be little scope to compromise, which in this context means allowing the negotiations to proceed with a promise of it (open border with Northern Ireland) being resolved later.”  


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