The Bank of England (BOE) may be worried about Brexit, but it'sconfident about the strength of the banks it regulates to weatherany storm.

The U.K.'s seven largest lenders all passed the central bank'slatest stress test, showing they're strong enough to continuelending even during a no-deal Brexit that could send the economyinto a tailspin.

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The central bank's stress test was even tougher than the dire“disorderly Brexit” scenario, which the BOE also releasedWednesday. That analysis includes an 8 percent drop in economicoutput within a year, a 25 percent drop in the pound, and a 30percent plunge in house prices.

In the stress test, two lenders—Barclays Plc and Lloyds BankingGroup Plc—triggered the conversion of some subordinated debt toequity to replenish their capital. Lloyds' exposure to U.K. housingand Barclays' large consumer focus make them more vulnerable todisruptions in the economy. No such conversion occurred for theother banks.

“The results are positive overall,” according to Samuel LopezBriceno, a senior analyst at Vanguard Asset Services. However,investors in some risky bonds and equity could be “significantlyhit,” he said, if lenders stopped coupon and dividend payments in astressed scenario.

The BOE's Financial Policy Committee “reviewed a disorderlyBrexit scenario, with no deal and no transition period, that leadsto a severe economic shock,” the regulator said on Wednesday. Thebanking system is “strong enough to continue to serve U.K.households and businesses” even in a no-deal divorce, it said.

In addition to their capital strength, banks also have theliquidity needed to survive a major market disruption, the FPCsaid. At group level, they have more than 1 trillion pounds (US$1.3trillion) of high-quality liquid assets, and could withstand morethan three months of stress in wholesale funding markets.

In addition to Barclays and Lloyds, the other lenders covered bythe test are HSBC Holdings Plc, Nationwide Building Society, RoyalBank of Scotland Group Plc, Santander UK Group Holdings Plc, andStandard Chartered Plc.

This year's stress test held banks to a new accounting standardthat will force them to make provisions for potential losses rightafter making a loan. But the BOE used a transitional form of therules, known as IFRS 9, softening the blow to their results.

In its Financial Stability Report, the FPC also:

• Maintained the U.K. counter-cyclical capital buffer requirementat 1 percent of risk-weighted assets;
• Kept up pressure on the EU to take action to prevent marketturmoil in a disorderly Brexit; and
• Found that U.K. banks' holdings of securitizations of leveragedloans are “very small.”

From: Bloomberg

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