Mortgage Relief - UK banks can withstand the next economic crisis

The Bank of England’s latest stress test of the financial system suggests that UK's eight largest lenders could survive a worst case scenario of plunging house prices, a deep recession and soaring inflation.

The banks and building societies that have been tested include: Barclays, Lloyds, HSBC, NatWest, Santander UK, Standard Chartered, Nationwide Building Society and Virgin Money.

The BoE also said that the country has "so far been resilient" to rapidly rising interest rates even if some businesses and individual "may struggle with repayments" on loans.

In its most recent six-monthly Financial Stability Report, out just before the weekend, the Bank admitted that raising base rate from 0.1 per cent in December 2021 to 5.o per cent now, in an effort to bring down inflation, has inevitably meant higher monthly mortgage payments and other household costs.

The report says: "Higher interest payments on loans mean some borrowers may struggle with their repayments, which increases the risks faced by banks … [but] UK banks are resilient and are strong enough to support their customers."

The report also showed the result of a "stress test" on UK banks and building societies to see if they could withstand catastrophic economic conditions.

These include house prices falling by 31 per cent, the unemployment rate increasing to 8.5 per cent and inflation rising to 17 per cent.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, says:  “The Bank of England’s latest stress test has shown the UK’s main lenders will be able to stomach worsening economic conditions. This includes the effects of weakening commercial real estate prices, recessions, higher rates and inflation.

“The tests come as a relief during a time that’s been marred by anxiety about regional banking failures in the US as interest rates have shot up in many major economies. A combination of strong balance sheets, healthy asset-classes and a stricter regulatory environment mean the UK’s financial giants also have more room to help customers if things get tougher, including changing the terms of loans if needed.

“The Bank of England also highlighted even smaller lenders are able to withstand a higher-rate environment.

“Overall, there aren’t too many people falling behind on their mortgage payments, but it’s widely acknowledged that the full extent of higher rates is yet to trickle down – and the point at which this happens is likely to have consequences for the wider economy and companies.

“For now, the number of households with high debt-service ratios – including accounting for the higher cost of living – is expected to grow in the second half of the year, and companies exposed to customers spending their discretionary income will be watching this closely. In a chink of optimism, the BoE highlighted the proportion of such households with reducing spending power is expected to remain well below the peaks seen in 2007.”