UK banks can face 30% contraction in the economy

Britain’s banks are strong enough to face a 30% contraction in the economy says the Bank Of England.

Concern has been expressed in several quarters about what could happen to the UK’s banking system if pressure from the coronavirus pandemic continues to affect the economy.

Share prices down

Banks share prices have fallen to levels not seen since the 2008 financial crisis and there has been a call for European countries to band together and create a €500 billion recovery fund prepared to bail out any country finding itself in trouble.

But asset fund manager Jamie Ward has backed the Bank Of England statement, saying: “The capital in the banking system now is multiples of the level it was in 2008.

Banks have shrunk since the crisis and changed their tune on risk and growth. They look like completely different businesses.”

Extra capital

The Bank Of England says the extra capital their country’s banks have raised since the financial crisis has come from selling shares and bonds and keeping profits in reserve, enabling them to raise £130 billion.

Stephen Jones, chief executive of UK Finance – the trade association for the banking industry – said: “For the last 10-12 years the increase in loss absorbing capital has been massive.

Solid

“Is everything going to be fine? We don’t know, but the Bank of England’s modelling suggests the system as a whole is solid.

“The banks aren’t the problem in this crisis, the impact of the pandemic on the wider economy is the problem.”

Concern

One of the figures most involved in resolving the 2008 financial crisis still thinks there’s cause for concern.

Sir John Vickers says he would like the banks to be even stronger, saying: “The global effort to reform the banks after the crisis of 2008 did a number of good things but I generally think of it as a job half done.

“In calmer times, we could have had a bigger capital buffer built at almost no cost to the economy – virtually free insurance and if we had done that we would have been in better shape going into the crisis.”