A disorderly Brexit and a global trade war are the two “live risks” that the Banks of England considers to be the greatest threats to the UK banking system.
In its latest Financial Stability Report, the Bank concludes that the “perceived likelihood of a no-deal Brexit has increased since the start of the year”.
It also notes “rising trade tensions” which have damaged business confidence and threaten to slow global economic growth.
The Bank of England stress-tests the UK’s financial system annually, to it is ensure it is robust enough to survive potential shocks without falling back into the arms of the taxpayer.
The Bank of England believes that UK banks remain “strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit”.
But it says “financial stability is not the same as market stability”. In the event of an abrupt departure there are likely to be wild swings in the price of shares, corporate and government bond and the value of the pound.
Earlier this week, during the leaders debate on ITV, Boris Johnson insisted that the costs of no-deal on October 31st could be prepared for and made “vanishingly inexpensive for us to prepare".
Last November, the Bank of England said, in at worst case scenario, a disorderly Brexit could trigger the worst economic downturn since the Second World War.
The Bank stands by the thrust of that analysis, although it acknowledges that the “worst case” scenario has improved slightly as businesses have had more time to prepare for potential disruption.
The Bank’s Financial Stability Committee has also decided that in 2021 the Bank should stress test the UK financial system’s resilience to “the physical and transitional risks of climate change”.
The Bank says the test will be “the first of its kind in the world” and is a sign it is leading on the issue. A discussion paper will be published in the autumn.