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Testing Brexit stress scuppers stress testing

By Jasper Cox
11 Oct 2018

Tucked away at the end of a press release, the Bank of England announced this week that it would delay a stress test for financial institutions. A messy departure from the EU could test the banks in real life instead.

The postponed probe is not the central bank’s annual stress test, which is still going ahead as planned, but what it calls a biennial exploratory scenario. This was supposed to be launched in March 2019, the month the UK is set to leave the EU.

Now it will be launched in September, as both financial institutions and the Bank of England will need to allocate resources to Brexit preparations instead, according to the Old Lady.

The exploratory scenario looks at how firms would respond if certain challenges persist long into the future: last year these included slow productivity growth and weak global trade.

No one knows whether UK prime minister Theresa May will sign a deal with the EU, and whether she would be able to get that agreement through parliament.

But it is not hard to imagine how a no-deal Brexit would aggravate those challenges.

Low interest rates were also a challenge explored in the scenario, and the Bank of England could well cut rates if the UK crashes out of the EU.

The Bank of England said in the summer it thought the banking system would not seize up in a disorderly Brexit. But the delayed test relates to longer-term examination.  

By the time the results will now be published, in June 2020, we may already have a good idea of what they will find.

By Jasper Cox
11 Oct 2018