U.K. Stress Test Results: Can Banks Survive No-Deal Brexit?

The Bank of England (BoE) released the results of its 2018 stress test, wherein all of the seven major U.K. based banks — HSBC Holdings plc HSBC, Barclays PLC BCS, Lloyds Banking Group plc LYG, The Royal Bank of Scotland Group plc RBS, Nationwide Building Society, Santander UK and Standard Chartered plc — passed with flying colours. The capital levels of all these banks are above the minimum requirement.

"No bank needs to strengthen its capital position as a result of the stress test," affirmed BoE's Financial Policy Committee (FPC) in a statement on Wednesday.

In fact, the BoE also mentioned that since these banks passed the test, they will not have to curb lending activities and hence will be able to withstand even a disorderly Brexit.

The BoE said that the crisis scenario that was used in the test included the potential effects of a no-deal, no transition Brexit, which is likely to place British banks in a more disadvantageous position than what was witnessed during the 2008 financial crisis.

Notably, this is the 2nd consecutive year in which U.K. banks have cleared the annual health check. Last year, even though, Barclays and Royal Bank of Scotland emerged the weakest under the severe economic stress scenario, they were not required to raise additional capital as they made significant progress in improving their respective capital positions. The remaining five banks exceeded the minimum required capital levels.

The FPC stated, "UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit."

However, following the stress test results, chances of Barclays providing increased payouts to its investors in the future seems to have diminished. Nonetheless, the bank said in a statement that it still intends to more than double its dividend per share to 6.5% in 2018, subject to regulatory approval.

In fact, the plans of other lenders like Lloyds, Standard Chartered and Royal Bank of Scotland to increase capital next year is not expected to be hampered because of the test.

Notably, as banks are taking measures to strengthen their financials and confront challenges, the stress test will further help regulators to keep a check on the banks and avert another crisis. Further, this will boost the lending capacity of banks, thereby bolstering their financial position.

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