The UK banking system remains “resilient” to a wide range of possible economic outcomes, according to a report from the Financial Policy Committee (FPC) at the Bank of England (BoE).

The FPC indicated that the banking system has the capacity to continue to support businesses and households even if economic outcomes are considerably worse than expected.

The report revealed that over the course of 2020, major UK banks’ and building societies’ aggregate Common Equity Tier 1 capital ratio increased to 15.8% at the end of September, which the FPC revealed is over three times higher than at the start of the global financial crisis.

Over this period, they have provisioned for £20bn of credit losses, although the report suggested the effect on the capital ratio is reduced by the transitional relief of IFRS 9.

The FPC is therefore anticipating ome headwinds to banks’ capital ratios over the coming quarters as unemployment rises, business insolvencies rise from current low levels, and risk weights on banks’ exposures increase.

However, the FPC also said it believes that major UK banks can absorb credit losses in the order of £200bn, a level much more than the Monetary Policy Committee (MPC) central forecast. The UK and global macroeconomic scenarios required to generate losses on this scale would need to be “very severe”, the report said, and would require UK unemployment rising to more than 15%.

“For many, the financial fears following this year’s pandemic are overriding, but the potential threat posed by a mismanaged Brexit has similar magnitude to the UK's long-term financial wellbeing,” commented Phoebus Software sales and marketing director, Richard Pike.

“Nonetheless, the BoE says it has mitigation plans in place to help the country weather any instability that comes at the end of the transition period, which offers some level of comfort.

“However, for the general public, fiscal thoughts are more likely to be related to job security, credit availability and disposable income. It is evident that lenders’ appetite for high LTV lending has diminished as income levels have been hit hard by the pandemic and credit risk increases. So it is good to see that the FPC is reviewing its mortgage market recommendations in 2021 to reflect the changes the market will face post-pandemic.”

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