November 28, 2017 / 7:46 AM / a year ago

UPDATE 2-No more pain for UK banks in 2017 BoE tests, but Brexit risks ahead

    * BoE says UK banks can cope with "disorderly" Brexit
    * UK banks avoid extra capital bill from 2017 stress test
    * Barclays and RBS struggle with tough requirements
    * Disorderly Brexit would still carry big economic costs -
    * Investors demanding bigger risk premia for some UK assets

 (Adds detail from news conference)
    By Huw Jones and David Milliken
    LONDON, Nov 28 (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.
    "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
    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.
    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)
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