Britain’s financial system can cope with Omicron – and more, according to new Bank of England research

The Bank of England calculated that Britain’s financial system can withstand an even worse disaster than the Omicron version.

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

Robust: According to Bank of England’s most recent stress test, even if the economy shrinks by 9% and unemployment hits 12%, the Bank of England says that lenders are not at risk of collapsing.

The Bank is scheduled to meet this week. They are expected to raise interest rates 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.

The bank decided to return to the normal capital levels that they have to keep in order to protect themselves from an economic shock.

To help lenders in times of crisis, the Bank had decreased the buffer from 3% to 0 percent last year. 

However, it now requires banks to have a buffer equal to 1 percent of their loans at the end of this year and 2 percent 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.

Although the Bank acknowledged that the move might help some first-time homebuyers, it won’t help all.

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 warned about the dangers of crypto-currencies. He claimed that although digital assets like Bitcoin weren’t yet a concern for financial stability they might be in the near future if they continue to grow in popularity.