Andrew Bailey calls on UK banks to pass higher interest rates on to savers

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Andrew Bailey has called on UK banks to pass on higher interest rates to savers as the Bank of England concludes that Britain’s top eight financial institutions are resilient enough to withstand a deep downturn. .

Speaking after the latest stress test on banks’ ability to weather a potential catastrophe, the central bank governor said lenders were in a strong financial position to pay more interest on their customers’ savings.

But bankers warned that the entire financial sector faced risks from a “highly uncertain” economic outlook and a “challenging” risk environment.

“It’s important that interest rates are passed on, and it’s also important that banks compete within the banking system to compete on savings rates,” Bailey added, adding that the U.K. economy, which asks banks to pay customers more interest, is important. We agreed with the demands of Prime Minister Jeremy Hunt. ‘ Savings.

Rising interest rates in the UK have boosted the core profitability of banks by boosting net interest margins, the difference between the interest rates banks charge on loans and the rates they pay on deposits.

“One big message from this morning is that the resilience of the banking system is not a constraint on how banks manage their net interest margins and thus the interest they pay savers,” said Bailey. he told reporters.

“Banks can make the necessary decisions on that front without restrictions.” [their interest rates] This is for financial stability reasons. ”

UK has been conducting regular bank stress tests since 2014, but nationalized Royal Bank of Scotland ordered to raise £2 billion, Barclays and Standard Chartered flag shortcomings We have not failed a lender since 2016.

The latest test covering NatWest, HSBC, Barclays, Stanchart, Lloyd’s, Santander, Nationwide and Virgin Money is set for September 2022, before a wave of US bank failures leads to the collapse of Credit Suisse. It was based on a given scenario.

“British banks are in a strong position to help customers facing payment difficulties,” the Bank of England said. “This should mean that default rates are lower than in past periods when borrowers were under pressure.”

Examination finds banks face aggregate loan losses of £125bn over five years from June 2022, lowering Common Equity Tier 1 ratio to 10.8% from current 14.2% It will be.

The Common Equity Tier 1 ratio is an important measure of financial strength that indicates the quality of a bank’s capital relative to the risk of loans and other assets. The passing stress test was a common equity Tier 1 ratio of 6.9%.

Barclays and Standard Chartered fell to their lowest levels during the stress test, at 8.5% and 8.8% respectively.

Some of the bank-tested shocks, such as UK interest rates rising sharply to 6%, followed by a ‘gradual reduction to below 3.5%’ by mid-2027, are now close to where they are now. . UK interest rates are set at 5% and are not expected to drop below 4% until at least the end of 2024.

But Bailey told reporters that the stress test’s “combination of rising interest rates and the global recession” and high unemployment represented a “much harsher” scenario than banks are currently facing. .

The stress-test economic scenario included a 5% contraction in GDP, a doubling of the unemployment rate to 8.5% and a 31% drop in property prices in 12 months.

UK banks have so far seen a rise in loan book delinquency, even as mortgage rates have risen above levels reached after the disastrous ‘mini’ budget in September 2022. He says he sees little evidence.

The BOE said Wednesday that if one million UK households refinanced their mortgages over the same fixed term as their current loans, higher interest rates could increase their monthly mortgage payments by more than £500 by the end of 2026. bottom. “Obviously there will be an impact,” Bailey said when asked about the impact of higher interest rates on such borrowers. . . It is part of the monetary policy transmission mechanism. ”

A further 2 million households will face an increase of between £200 and £499, while about 4 million households will see even smaller increases in their monthly payments.

Officials say UK households and businesses are facing rising debt costs, but the debt burden is “somewhat below” its 2007 historic peak and banks are “tolerant” to distressed borrowers. “, so mortgage defaults in particular should be limited,” he said.

“British banks play a key role in supporting the UK economy and these results give us further confidence that the UK can withstand severe shocks. We will continue to lend as soon as possible,” said NatWest Chief Financial Officer Katie Murray.

Additional reporting by Jane Croft, Siddharth Venkataramakrishnan, and Valentina Romei