UK PLC can cope with Omicron and more, says Bank of England

Britain’s financial system is strong enough to withstand a disaster far worse than the latest Omicron variant, the Bank of England has calculated.

Even if the economy shrank by another 9 per cent, unemployment spiked to 12 per cent and house prices tumbled by 33 per cent, lenders would not be at risk of collapse according to the central bank’s latest stress test which is part of the Financial Stability Report.

It meant that all eight of the UK’s major banks – including the likes of Barclays, Lloyds Bank, HSBC and NatWest – passed the stress tests.

Robust: Even if the economy shrank by 9%, unemployment hit 12% and house prices fell 33%, lenders would not be at risk of collapse, according to the Bank of England’s latest stress test

The Bank meets this week and is expected to hold interest rates on Thursday.

Yesterday it said there was still a large amount of economic uncertainty, and that Covid could still have a ‘greater impact’ on the economy if new variants plunged the country back into lockdowns.

The Bank’s governor Andrew Bailey said: ‘The UK and global economies have continued to recover from the effects of the pandemic. But uncertainty over risks to public health and the economic outlook remains.’

Despite the lingering worries, officials on Threadneedle Street judged that ‘vulnerabilities’ in the financial system are at standard levels, as before the pandemic.

It therefore decided that the levels of capital which banks have to hold to prepare for an economic shock should return to their normal rates.

The Bank had lowered the buffer to 0 per cent last year, in case lenders needed the cash to help boost the economy when the pandemic hit. 

But it will now ask banks to hold a buffer worth 1pc of their loans by the end of next year, and 2 per cent by 2023.

The Bank of England’s Financial Policy Committee (FPC) also announced it would remove a requirement that mortgage borrowers must be able to afford a 3 per cent increase in interest rates.

The move could help some home-buyers get a loan, though the Bank admitted that it would not help many first-time buyers move onto the housing ladder.

Rather than being aimed at boosting the number of people who could buy a house, Bailey said he was scrapping the affordability check as it added little to separate affordability rules from the Financial Conduct Authority and a further requirement which limits most mortgages to 4.5 times a borrower’s income.

But Paul Broadhead, head of mortgage and housing policy at the Building Societies Association, said: ‘We welcome the Financial Policy Committee’s intention to withdraw the affordability stress test for new mortgages. 

This measure mainly impacts certain borrowers, such as first-time buyers and those looking to buy in the South East, who can clearly afford a mortgage but are hindered by the requirement to test that they could still pay their mortgage if rates were in the region of 6 per cent plus.’

Bailey also sounded the alarm over crypto-currencies, claiming that digital assets like Bitcoin were not yet a risk to financial stability but could be soon if they carried on growing in popularity.

This post first appeared on Dailymail.co.uk