By Huw Jones and David Milliken
LONDON (Reuters) - Britain's banks all avoided bills for more capital in annual stress tests for the first time since 2014, but the Bank of England warned of pain ahead if there is no Brexit deal and said the country's current account deficit posed a big risk.
High-street banks could cope with a "disorderly" Brexit without curbing lending or being bailed out by taxpayers, the BoE said on Tuesday after its annual health check on lenders.
Nevertheless, Barclays and RBS struggled to make it through the tests, relying on capital raised this year rather than in 2016, as normally required for a passing grade.
Britain's other main lenders - HSBC, Lloyds Banking Group, Santander UK, Standard Chartered and the Nationwide Building Society - all passed.
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"The (BoE) ... judges that the banking system can continue to support the real economy, even in the unlikely event of a disorderly Brexit," Governor Mark Carney said at a news conference.
However, he said it was in the interests of both Britain and the EU to reach a deal before Brexit in March 2019, despite slow progress so far.
"In the event of a sharp disorderly Brexit, there will be an economic impact on households, on businesses. There will be lost markets before new markets are found, and there will be some pain associated with that," Carney said.
Furthermore, if a disorderly Brexit were to hit at the same time as a deep global recession and more big misconduct fines for banks, it is unclear if the banking system could cope easily, he added.
Britain's banks have had to triple the capital they hold as a cushion against potential losses since the 2007-09 global financial crisis which plunged the country into a recession.
The BoE had warned of the potential costs of Brexit before the June 2016 referendum, drawing ire from Brexit supporters who said Carney was politicising the central bank. The BoE says its mandate requires it to talk about where it sees economic risks.
On Tuesday, Carney said there were signs that foreign investors were demanding greater risk premia to hold some UK assets - though not government bonds or FTSE 100 shares.
In its half-yearly Financial Stability Report, the BoE said appetite for British assets could slump if the growth outlook darkened or if there was a loss of confidence in British economic policy or its openness to trade and investment.
Britain's current account deficit - which government forecasters expect to exceed 4 percent of GDP for the foreseeable future - was also a material risk, the BoE said.
RBS said it was making progress towards being a "stress resilient" bank. Barclays noted that it did not need to raise fresh capital.
STRESS RELIEF
British lenders and finance minister Philip Hammond will breathe a sigh of relief after this year's stress tests.
Last week the government said it planned to sell 3 billion pounds of public holdings of RBS shares during the next financial year to help reduce public debt.
Britain's economy has lost momentum this year as higher inflation - largely due to the fall in the pound since June 2016's Brexit vote - eats into households' disposable income.
Last week government forecasters sharply downgraded their outlook for the next few years.
"Any Brexit-related slowdown in consumer spending is a big potential headache for the banks," Laurent Frings, head of credit research at Aberdeen Standard Investments, said. "Investors need to be mindful of how much comfort they take from the tests."
The BoE said it was pressing on with plans to raise a risk buffer to 1 percent from 0.5 percent with binding effect from November 2018. This extra cushion was already covered by capital banks held in excess of the regulatory minimum.
The BoE said it would consider in the first half of 2018 whether the buffer needed to be raised further in the light of Brexit risks.
It also said British and European Union lawmakers needed to pass new laws to ensure there was no disruption to 26 trillion pounds ($34.6 trillion) worth of cross-border derivative contracts and 36 million insurance contracts - 30 million of which are held in EU countries other than Britain.
($1 = 0.7515 pounds)
(Writing by David Milliken; Editing by Hugh Lawson)
Disclaimer: No Business Standard Journalist was involved in creation of this content
