British bonds buoyed by Brexit risks, but prone to inflation burn

Mark Carney

Mark Carney

The stress test will take place later this year and it's found lenders aren't sufficiently prepared the Bank force them to make changes.

Last year Royal Bank of Scotland, which is 73% owned by taxpayers, was the biggest failure in the stress tests, while Barclays and Standard Chartered also struggled.

The analysis also includes a warning that the new European Union relationship could mean greater complexity in banks' structures - which would make oversight more difficulty - and the FPC is looking at ways to mitigate this.

The "exploratory stress test" will probe the UK's seven largest lenders on how they would cope with weak global growth, low interest rates, falling world trade and cross-border banking activity as well as misconduct costs over that time.

It is understood the main reason RBS failed the 2016 stress test was the threat of a huge fine for mis-selling of United States mortgage securities, which some feared could climb as high as £12 billion.

The Brexit and high household indebtedness are some of the main risks to UK's financial stability, the Financial Policy Committee of the Bank of England said Monday.

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"This will consider how the resilience of the United Kingdom banking system might evolve if recent headwinds to bank profitability persist and intensify", the bank said in a statement describing decisions made during a Financial Policy Committee (FPC) committee meeting earlier this month.

The FPC said it now overseeing contingency plants to reduce financial stability risks as negotiations get under way.

Global economic risks have also increased, primarily due to rising debt levels in China.

Policy uncertainty was an increased risk, the FPC said, adding: "The high degree of uncertainty in many advanced economies appears not to be fully reflected in asset prices, which have risen sharply in recent months, or in measures of market volatility, which remain subdued".

It also threw up warnings over protectionist policies, noting greater uncertainty around support for global trade and worldwide financial integration - which it said has not yet been fully priced into financial markets.