Top stories

  • Banks can withstand severe economic disruption of ‘no-deal’ Brexit, says Bank of England
  • Bank warns household debt levels pose financial stability risk
  • Minister highlights ‘no-deal’ security threat

Stat of the day

10.5 per cent – the Bank of England’s assessment of the likely extent of the drop in GDP, over a five-year period, in the event of a worst-case scenario, ‘no-deal’ Brexit (Financial Times
https://www.ft.com/content/8b425346-f329-11e8-9623-d7f9881e729f, £, p1).

Banks can withstand severe economic disruption of ‘no-deal’ Brexit, says Bank of England

The Government and Bank of England published separate analyses yesterday of the likely impact on the UK economy of different potential Brexit scenarios. The Government’s analysis suggests that the UK economy will grow more slowly under any Brexit contingency, but that the negative impact of the Government’s preferred terms of exit and future relationship with the EU will be much less significant than under a cliff-edge, ‘no-deal’ withdrawal (The Guardian
https://www.theguardian.com/politics/2018/nov/28/uk-significantly-worse-off-under-all-brexit-scenarios-official-forecast-gdp, p1).

The Bank of England’s assessment of the economic impact of a ‘no-deal’ Brexit warns that gross domestic product could fall by as much as 10.5 per cent over a five-year period, compared with pre-referendum levels, that house prices could fall by 30 per cent, and that price inflation may rise to as much as 6.5 per cent (Financial Times
https://www.ft.com/content/8b425346-f329-11e8-9623-d7f9881e729f, £, p1).

However, the results of the Bank’s annual stress test of banks’ balance sheets show that the financial system would be resilient to even the severe economic shocks that could result from a ‘no-deal’, disorderly withdrawal from the EU (The Telegraph
https://www.telegraph.co.uk/business/, £, B1).

Stephen Jones, Chief Executive of UK Finance, said:

“The UK banking system has significantly enhanced its financial resilience over the past decade. The stress test results demonstrate that UK banks have strengthened their financial position and have the capacity to continue supporting the real economy in the event of a severe economic shock.

“However, a ‘no-deal’ Brexit would have a devastating impact on the broader economy which is why the finance industry’s priority is to ensure a managed exit from the EU, minimising disruption and additional costs for the customers and businesses we serve”

Meanwhile, the Shadow Chancellor, John McDonnell, told BBC News
https://www.bbc.co.uk/news/uk-politics-46373787 (online only) in an interview that a second referendum on leaving the EU “may be inevitable”, acknowledging that the Fixed-Term Parliaments Act makes it difficult for the Labour Party to secure its preferred outcome of a General Election in the event that the Prime Minister’s Withdrawal Agreement does not secure parliamentary approval.

Bank warns household debt levels pose financial stability risk

The Bank of England’s November Financial Stability Report, published alongside its bank stress tests, warned that high levels of household debt – though lower as a percentage of incomes than before the financial crisis – could pose a risk to financial stability in the event of an economic downturn (The Times
https://www.thetimes.co.uk/article/household-debt-is-risk-to-economy-bank-warns-hb39ljmx6, £, p41).

The report also reiterated the Bank’s previous warning that a continual increase in the number of loans to highly indebted companies “shares similar trends with the US sub-prime mortgage market before the crisis”. It added, however, that international banks hold only one third of the securitisations of such loans and that UK banks’ holdings of collateralised loan obligations “are very small” (Bank of England
https://www.bankofengland.co.uk/financial-stability-report/2018/november-2018).

Minister highlights ‘no-deal’ security threat

Security minister Ben Wallace has said that a ‘no-deal’ Brexit could have a significant effect on UK-EU security ties, reports the BBC
https://www.bbc.co.uk/news/uk-46380153. The minister warns that if a Brexit deal is voted down by parliament and no solution is reached, there are no arrangements in place to ensure continued security co-operation with the EU, and that this would have a “real impact” on protecting the public. Wallace’s comments follow reports from the Financial Times
https://www.ft.com/content/6719b6b2-f33d-11e8-9623-d7f9881e729f (£, online only) that Britain and Germany are growing wary of allowing Chinese telecoms company, Huawei, to install 5G equipment in their countries, after concerns that the company’s technology could be vulnerable to cyber-attacks and could affect national security.

Meanwhile, the UK’s intelligence service, GCHQ, has revealed that it does not always inform British companies that their software is susceptible to cyber-attacks (Sky News
https://news.sky.com/story/gchq-reveals-it-doesnt-always-tell-firms-if-their-software-is-vulnerable-to-cyber-attacks-11566497). A GCHQ statement confirmed that it judges the UK’s national security interests are better served by “retaining knowledge of a vulnerability” in a company’s infrastructure, to prevent that information being used by terror groups and serious crime gangs.

Latest from UK Finance

On the blog
http://bit.ly/DECLTblog today, Paul Chisnall, Director, Finance & Operations Policy, discusses the first report by the Taskforce on Disclosures about Expected Credit Losses.

News in Brief

The latest monthly survey from YouGov and the Centre for Economics and Business Research shows that consumer confidence has fallen to its lowest level in a year (The Times
https://www.thetimes.co.uk/article/brexit-uncertainty-drains-confidence-among-consumers-nx87hrsmv, £, online only).

Frankfurt Main Finance, a group which promotes Frankfurt as a financial centre, estimates that 30 banks are moving operations from the UK to Germany as a result of Brexit, relocating €750- €800bn worth of assets in the process (Financial Times
https://www.ft.com/content/a9111f38-f3ab-11e8-ae55-df4bf40f9d0d, £, online only).

The CBI reports that confidence among the UK’s business and professional services firms has reached its lowest level in two years (Reuters
https://uk.reuters.com/article/uk-britain-economy-services/mood-in-uk-services-firms-sours-ahead-of-brexit-cbi-idUKKCN1NY001, online only).

A number of business groups, including the Institute of Directors and the CBI, have criticised the recommendations made in a report commissioned by the Labour Party into executive pay. The report, under review by Labour, proposes a ban on all share options, and that the customers of Britain’s biggest 7,000 companies be handed a veto over executives’ pay packages (Financial Times
https://www.ft.com/content/a25bcd5e-f2e9-11e8-ae55-df4bf40f9d0d, £, p2).

In an interview with Politico (online only
https://www.politico.eu/article/trump-border-wall-i-dont-do-anything-just-for-political-gain-shutdown/), the President of the United States warned that he is prepared to allow a federal government shutdown if congress rejects his allocation of funding for a border wall along the border with Mexico.

What the commentators say

The Financial Times
https://www.ft.com/content/6f39e4e4-f2f6-11e8-ae55-df4bf40f9d0d (p10, £) editorial board declares its “conditional support” for Theresa May’s deal. It argues that her agreement is “manifestly inferior” to the UK’s existing terms of membership, but claims it respects the results of the referendum while tempering the negative economic impact of an act of “grievous” self-harm. Should the deal fail to pass parliament, as the paper predicts, the paper calls upon MPs to be ready to “stop the clock” on Article 50 and potentially seek a Norway-style agreement.

Writing in The Times
https://www.thetimes.co.uk/article/brexit-mark-carney-has-reason-to-be-gloomy-mbsjqktmb (online only, £), Philip Aldrick warns that Mark Carney’s gloomy outlook on Brexit is warranted. He notes that when a recession failed to materialise in the immediate aftermath of the referendum, leave campaigners deriding the experts appeared to have been vindicated. However, Aldrick argues yesterday’s Bank of England Brexit analysis is almost certainly accurate in expecting long term economic growth to be severely impacted by a ‘no-deal’ Brexit.

Calendar

  • Prime Minister gives oral evidence to the House of Commons
  • The Banker’s Bank of the Year Awards – Financial Times
  • Bank of England publishes Money and Credit statistics, October

For a full list of upcoming UK Finance statistics releases, please click here
//www.ukfinance.org.uk/statistics/.

News in brief – 29 November 2018