A stress test has shown that Britain’s top banks and building societies could keep lending to an economy that shrinks by almost 30% in the coronavirus pandemic, the Bank of England said on Thursday.
Separately, the BoE held off from further stimulus measures but said it was ready to take more action to counter Britain’s biggest economic slump in over 300 years.
The BoE’s interim Financial Stability Report (FSR) said its “desk top” stress test was based on an economic scenario outlined by the its Monetary Policy Report (MPR).
Under the MPR scenario, Britain’s GDP drops by almost 30% in the second quarter versus the fourth quarter of last year and recovers as lockdown restrictions are lifted.
Britain has been in lockdown since mid-March and the government is expected to announce some easing of restrictions in the coming days.
The stress test showed that banks have the capital buffers to withstand even greater losses than those that result from the MPR scenario, the FSR said.
“Overall, in the desktop stress test based on the MPR scenario, banks incur total credit losses of just over 80 billion pounds ($98.86 billion).”
“Overall, banks have the capacity to assist businesses in meeting cash-flow deficits by expanding the supply of credit to the economy.”
BoE Deputy Governor Jon Cunliffe said that if banks failed to provide support, as they did in the financial crisis 10 years ago, the overall economic outcome would be worse and lead to greater losses for banks.