The Bank of England’s latest stress test on the UK’s lenders confirms the country’s banking sector would be able to cope with a significant economic downturn. This will be a relief to people worried about the sector in the aftermath of several banks in US and Europe getting into trouble earlier this year.
AJ Bell’s Danni Hewson said: “While everything was fine and dandy in the stress test, the outlook is far from rosy and reality is beginning to approach those stress test scenarios. The more interest rates go up, the greater the risk of some borrowers not being able to repay their debts and the greater the chance of an economic slump.
“UK banks are well capitalised and should be able to continue lending during a more difficult economic environment such as a housing crash and much higher unemployment. However, there is still the risk of greater delinquencies among customers.
“If things get worse, banks will be under pressure from the government to provide support measures to customers struggling with higher rates. While that might not be good for earnings, this would be a perfect opportunity for banks to show they are responsible corporate citizens and that it’s not all about making every penny possible from the customer base.
“In a more difficult economic environment, banks would be under pressure to cut dividends, reduce bonuses and be more patient regarding loan repayments. Given that most investors own shares in banks for their generous dividends, such a move wouldn’t go down well with those holding the likes of Lloyds and NatWest in their ISA or pension.”