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Brexit: Carney talks up capital levels as banks slump

Early thoughts on what the UK's decision to leave the European Union could mean for the financial services sector
June 24, 2016

Maybe all that capital raising was not such a bad idea.

After share price falls of a quarter across the UK’s major banks on the morning of the EU referendum result, Bank of England governor Mark Carney was keen to stress the strength built into the financial system.

“The capital requirements of our largest banks are now 10 times higher than before the crisis," he said, restoring some faith to shares. "The Bank of England has stress tested them against scenarios more severe than the country currently faces.”

Mr Carney also spoke of “extensive contingency planning” at the central bank in the event of a UK decision to leave the political union.

At the latest stress test in December, all the major UK banks had their capital plans waved through by the regulator. Lloyds (LLOY) and Barclays (BARC) came through especially strongly.

 

 

But the stress test was predicated on an emerging markets-led slowdown, areas where other banks have larger exposures. So it is little surprise that the banks with the largest retail operations and exposure to the UK property market have suffered the most today.

Banking analysts were focused on the longer-term problems caused by the vote. Cenkos analyst Sandy Chen said in a morning note that "markets will now also have to price-in the probability that both Scotland and Northern Ireland will eventually vote to leave the UK".

Lloyds would be hit hardest by falling house prices, he said, adding: "Scotland voting to leave the UK in a rehash of their referendum will hurt Lloyds and RBS particularly badly in terms of how much it will cost to separate their Scottish operations."

The share price falls leave most lenders trading at major discounts to their book value (accurate at time of writing):

Price/book value
RBS0.5
Lloyds1.0
HSBC0.6
Barclays0.5
Standard Chartered0.5

The sentiments were echoed by financial services companies seeking to reassure shareholders. Insurer Aviva reiterated its Solvency II capital ratio, of capital over the regulatory requirement, of 180 per cent.

The company said in a statement: “Aviva has one of the strongest and most resilient balance sheets in the UK insurance sector with low sensitivity to market stress and over the past four years Aviva has tripled its economic capital surplus.”

But a big question remains over the impact of the sterling devaluation, which could tie the hands of the members of the BoE’s monetary policy committee if it causes a rise in inflation.

It also arguably puts the brakes on the government's planned public share sale of Lloyds and makes it more difficult to extract the forecast value from its Royal Bank of Scotland (RBS) stake.

Read all our Brexit reaction:

Leave's triumph rocks markets

Carney talks up capital levels

Companies respond

Consumer confidence could see 'significant swings'

Property and housebuilders and that silver lining

Rush for gold

Bad news for the nation's scientists