The Bank of England put out its latest financial report and said UK banks are well prepared for economic turbulence. Banks have built strong capital buffers, the report said. According to the report, a no-deal Brexit won't pose a risk to the banks.
UK banks have prepared to absorb around £200bn in credit losses. Bank of England said it allows the banks to mitigate any financial shock a no-deal could pose. UK banks can also deal with the economic challenges posed by the pandemic. However, the Bank also said that credit losses that massive are extremely unlikely. They would require unemployment figures to rise to 15%, for example.
Although UK banks can absorb economic shocks, there might be other economic challenges if the negotiations don't end in a deal, the Bank said. The report stated, "Financial stability is not the same as market stability or the avoidance of any disruption to users of financial services. Some market volatility and disruption to financial services, particularly to EU-based clients, could arise."
Eyes on mortgage debt
The Bank noted the positive activity in the housing market. However, the report went on to warn about the dangers of increasing mortgage debt. Advertised mortgage products have decreased, and some lenders have withdrawn at higher loan-to-value ratios.
Preventing a rapid increase in mortgage debt is vital. In past financial crises, high levels of mortgage debt have increased risks to the system. The Bank's Financial Policy Committee recommended measures to ensure the build-up doesn't take place. The measures include limits to how many new mortgages with high loan-to-income ratios lenders would give out. Limits could ensure the number of households in debt stays at controllable levels. The Bank's policy recommendations are under review, with conclusions and proposals set to be published next year.
Mortgage approval rates hit their highest level in 13 years last month, according to the Bank's statistics. Homebuyers are enjoying from the stamp duty holiday, and house prices have rebounded in recent months.
Preparing for no-deal Brexit
The report comes after UK Prime Minister Boris Johnson warned the country to prepare for a no-deal Brexit. Contingency plans are already in the works by Brussels to limit disruption to air travel and trade. The Bank also went on to warn about possible disruption to financial services. But the UK banks seem to be in a good position to handle economic shocks.
Consumers have also been cautious about financial health. Although mortgage applications are strong, consumers are more careful about borrowing using credit cards. Credit card debt has fallen by 13% in the last year. The Bank is optimistic that once restrictions ease and the new year begins, consumer spending might rebound and help the economy through any turbulence that might be in the horizon.
