Banking system can withstand a 'cliff edge Brexit'

Sir Dave Ramsden deputy governor, markets and banking at the Bank of England, spoke during his visit to the North-East this week.

During his tour of the region he visited Nissan in Sunderland, Atom Bank in Durham and met the leading tech entrepreneurs from the business community.

He answered questions from Northern Echo reporter Gavin Havery

What will you take away from your visit to the North-East?

The diversity and the range of different industries, and sectors here. We have been to Atom bank, a company which did not exist a few years ago. I was shown around Nissan, the biggest employer in the region.

One is a high end manufacturer with a highly productive plant and the other is a relatively new bank.

I also did a school visit and had fantastic engagement from the kids and the teachers.

I get a real sense of the diversity of the economy, and how relevant what is going on in those different parts of the economy, are to what we do in the Bank of England.

Nissan last week said a ‘no deal Brexit’ would have 'serious implications' to its operations in the North-East. What can be done to help Nissan secure its future in the region?

From a Bank of England perspective we’re advising the Government on some of technical financial services aspects of the Brexit negotiation. We tend to think about it beyond that, in terms of our policy responsibilities. The sense I got from I read about Nissan and from visiting them, is that they are having to deal with, as a lot of car makers are, from the challenges of changes to diesel emissions. That has been a big structural issue for them to take account of.

The sense we pick up from Nissan is that people recognise there is a negotiation on Brexit that has to take place and has to be resolved and all industries want to see a resolution to that. They want an end to the uncertainty.

What companies are having to do, as the Bank of England announced on Tuesday, is have to think about what happens if there isn’t a deal. What people are calling a disruptive ‘cliff edge’ Brexit. In the bank we are thinking about that in terms of financial services, contracts, particularly in derivative markets but also insurance. Nissan will be making their own plans and those contingency plans are important to have in place.

We are coming up to some key milestones in the negotiations where planning is having to be increased.

They have to plan for these very challenging outcomes if there was a cliff edge Brexit.

Is there anything the Bank of England can do if there, in terms of policy making, if there was ‘no deal’, to help Nissan?

We make contingency plans for extreme, worst case probability outcomes and the Government would want us to do that planning which is very specific for the financial services sector which is where our responsibilities of financial stability lie. We have to think ahead. Taking monetary policy, for example, we put up rates in August to 0.75 per cent. We have to think ‘were we in that scenario of cliff edge Brexit, what would that mean for policy?’ All we can run there are scenarios. We would have to see what the conditions were like at the time. Such is the nature of the different outcomes, we have to be ready so policy committees can respond, if that is where we get to, whilst also planning that we don’t get to that extreme scenario if there is a deal done and the economy keeps growing. Markets are expecting, that, in that world, we’ll be putting up rates over the next two or three years. I think the current market expectation is two or three more rate increases over the next two or three years. That is the central expectation because the economy keeps growing, the labour market does well. We also think what the policy response might be, what our response might be.

Beyond that prudent planning I don’t think there is much more. We are limited in our remit for monetary and financial stability. We don’t really go beyond that to advise what the outcome should really be. That is for the Government to negotiate on behalf of the country in terms of Brexit.

In terms of Brexit, what is the worst case scenario, regarding inflation and interest rates, things that will affect people’s weekly shopping basket?

I am not going to go into that kind of forecast. What I will say, because it is relevant and we published details on this earlier in the week, is our Financial Policy Committee tested the core of the financial system last year against a shock where unemployment rose about nine per cent, house prices fell by 33 per cent and interest rates went up.

It is called a stress test and we said, in those circumstances, the core of the banking system, had enough capital to keep on lending to businesses and consumers around the country.

That is a contrast to what happened in the financial crisis ten or 11 years ago that hit this part of the country very hard, when banks did not have enough capital, when they were hit with a big financial shock and we had a deep recession.

That scenario encompasses a very bad Brexit.

We are confident that the core of the financial system, the big banks in the UK have enough capital in reserve that if a really big shock came along, which encompasses a bad Brexit then banks would keep lending.

It should make people think, in terms of the banks, that they have enough capital to cope with that crisis. What we found out ten years ago is that they did not and had to be bailed out by the Government.

There are still some parts of contingency planning that need in the wider financial system to be done such as continuity of contracts, certain financial services where companies probably have not got enough time to sort it out for themselves.

Is monetary policy always a ‘one size fits all’ or can things be done that are specific to certain regions, such as the North-East?

It is a good question that we get asked a lot. My background is as a macroeconomist and when I look at how I asses the UK economy I look at the official statistics of the UK as a whole and this is where our agency network come in. Regional statistics underpin that so we know the North-East labour market is almost as strong as the UK labour market. Unemployment is four and a bit per cent and employment is close to a record high, same as the UK. We have a North-East agent, which gives us a real presence here in the North-East. We get a structured set of inputs from the agent where they go around and talk to a whole range of firms. They mark what the firms tell them how they are feeling about employment, wages and investment. We get that back in London so we get all of this material in to help underpin our nationwide picture so if regional differences emerge that would then go back into the national picture as additional insight.

What will you take away from your visit to Atom bank?

From the Bank of England’s perspective, we have a primary objective to ensure the safety and soundness of individual firms, both financial companies, banks and insurers. We also think competition in the market. What you have seen in recent years is a real change in the UK landscape. There are a lot of new banks that have been created. You have got two up here. You have got Virgin Money, which was created out of Northern Rock, but then you have got Atom, a completely new proposition. As banking services become more digital and more online, you are seeing that it is also encouraging greater competition and greater numbers entering the market. You are seeing a greater number of banks in the UK system and Atom is one example. They are part of a more varied financial ecosystem, which is very much online, and based around an app. It has been really interesting to talk to them. They are based in the North-East, employ 300 plus people and are growing, so that is a new dynamic in the North-East economy.

Is there a message to businesses who are concerned about the adverse effects of Brexit?

The Bank of England is very focussed through this period, whatever happens, of being true to our mission which is to maintain monetary and financial stability. That is a mission we have had since 1694 and we are doing everything we can ensure the maintenance of monetary and financial stability, which means low inflation, making sure the wider financial system can cope through this period.

Any interest rates will be limited and gradual. That is predicated on the economy continuing to grow in line with our forecast which are conditioned on a smooth Brexit with a range of outcomes for the trading arrangement. That is the appropriate way to frame the forecast.

The Monetary Policy Committee’s forecast shows growth continuing of 1.75 per cent a year, but we are also having to have contingency plans for what could happened because we are still having to deal with all of this uncertainty around Brexit.

We are not making predictions about recessions. We have a forecast which very clearly shows we are not going anywhere near a recession. One and three-quarter per cent is what we have been growing for the last two years. We look at different scenarios, including the worst case, where we stress test the financial system, but that is not a forecast. It is a test we apply to banks to ensure they have got enough capital to withstand something as bad as what happened ten years ago. It is important to get that message across. That is what we are doing to show actually how resilient the financial system is.