The UK banking system would be resilient to deep simultaneous recessions in the UK and global economies even more severe than the global financial crisis, according to the results of the Bank of England’s (BoE) 2019 Annual Cyclical Scenario Stress Test (ACS).

The BoE indicated that even combined with large falls in asset prices and a separate stress of misconduct costs, the banking system in the UK would be able to continue to meet credit demand from UK households and businesses.

In the 2019 stress test scenario, it was revealed world GDP would fall by 2.6% and UK GDP would fall by 4.7%, while there would be bank rate rises to 4%, as well as UK unemployment rate rises to 9.2%.

Losses on corporate exposures were higher than in previous tests, which the BoE suggested was reflecting some ‘deterioration in asset quality’ and a ‘more severe global scenario.’

The BoE also pinpointed the weakness in banks’ underlying profitability, which reduces their ability to offset losses with earnings, but revealed that the seven participating major UK banks and building societies for the stress test – Barclays, HSBC, Lloyds Banking Group, Nationwide Building Society, The Royal Bank of Scotland Group, Santander UK and Standard Chartered – would all remain above their hurdle rates.

Furthermore, the BoE said that banks’ resilience is partly reliant on their ability in stress to cut dividend payments, employee variable remuneration, as well as coupon payments on additional Tier 1 instruments.

The BoE highlighted that if banks had not cut their distributions during the stress, collectively they would not have met the 2019 ACS hurdle rate, and therefore suggested that investors should ‘be aware’ that banks would make such cuts as necessary, in the event that a stress were to take place.

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