Stress test is key to making sure the banks can function in a downturn
The Bank of England’s agent for Wales, Ian Derrick, on the role of the central bank in ensuring the financial system works for both lenders and consumers
AKEY job of the Bank of England is to ensure that the financial system works well for everyone. By that, we mean that households and businesses across the country can rely on banks, building societies and other financial firms through thick and thin.
We know from the thousands of conversations we have had with businesses here in Wales since the financial crisis the costs to us all when that isn’t the case.
It makes it harder for businesses to raise money to invest and create jobs. And families find it more difficult to access mortgages to allow them to buy a house or move home.
In short, if the financial system isn’t functioning properly, we all pay the price.
For this reason every year the Bank of England subjects the UK’s major banks to a rigorous stress test to see how well they would cope with a severe economic downturn.
In this year’s test the scenario was particularly challenging. It included a sharp drop in economic growth at home and overseas, a big rise in unemployment to nearly 10%, higher interest rates and a severe fall in property prices.
Despite the severity of that test, for the first time since the Bank of England began stress-testing in 2014, the banks came through it without the need to take any action.
These results reflect the hard work that has been undertaken to increase the resilience of our banks since the financial crisis – a process that is continuing. And they give us confidence that the banking system can continue to provide a service to businesses and households even in much tougher economic conditions than they face today. This would even be the case if the UK experienced a disorderly exit from the European Union. Of course, Brexit could affect the financial system more broadly. For this reason, the Bank has also set out some key steps that need to be taken to minimise the impact on this important sector of the UK economy in the event of a no-deal outcome. The Bank’s latest Financial Stability Report also addresses other issues that I know from the discussions we have with our contacts here in Wales many people are concerned about. This includes the level of household debt which, at £1.6 trillion, is high by historic standards and relative to income, even though it remains below its 2008 peak. Debt gets a bad press but it provides a valuable service, notably by allowing people to make purchases they would otherwise not be able to pay for in one go. But high household indebtedness can pose a risk to financial stability. In order to address these risks, the Bank’s Financial Policy Committee has already taken action in the mortgage market to guard against the risk of looser underwriting standards and prevent an increase in the number of highly indebted households. Fast growth in con- sumer credit is another area the committee has addressed, by requiring banks to make more realistic assumptions about the potential losses on that type of lending.
By vigorously stress-testing the the financial stability of the UK.
That should give households and businesses here in Wales the confidence that the financial system will continue to provide for them, whatever the future holds.