How safe are British regulated banks?

properties. This has effectively made hundreds of thousands of homeowners stranded and unable to sell.

Michael Gove, Secretary of State for Housing and Communities, is pursuing the housebuilders to stump up the cash needed to solve the safety issues. There is no confirmed figure yet, but £4bn across the housebuilders with profits over £10m is thoughttobethenumberthegovernmentis likely to request/impose. Gove recently proposed a new Building Safety Bill, which includesmeasuressuchasblockingplanning permission and not signing off building control on new developments for those developers who have not overhauled the cladding on buildings they built. More importantly, the bill will also allow building owners to take legal action against manufacturers who use defective products ondevelopmentsthathavesincebeenfound to be unfit for habitation. The power will stretchback30yearsandallowtherecovery of costs which have already been paid out.

This is not only an issue for the housing building sector and for those stuck in unsellable properties. The Prudential RegulationAuthority(PRA)areincreasingly concerned about the impact the cladding crisis might have on financial stability. They claim the government has not yet grasped the scale of the cladding crisis and expects that the cost to mortgage lenders will be larger than those outlined so far. The PRA hasbeenurgingmortgagelenders,including Lloyds and Nationwide, to conduct thorough audits of their loan books to determine how much capital is at risk because of the crisis. We expect to have clarity on the government’ sdecisionbytheendof March, which should reduce the uncertainty on the listed housebuilding sector in the UK and providesomerelief totrappedhomeowners.

How safe are British banks?

The Bank of England in 2021 has reviewed the banking sector, assessing it during a periodof severeeconomicturbulence.They askedthe8largestUKregulatedbankswhat would happen if the following economic scenario were to happen: • GDP were to fall by 9%, with a sudden spike down at the beginning of the drop • Thisdroptofollowonfromtheproblems arising from Covid in 2020 • GDPtodropby37%overa3yearperiod when compared to 2019’ s GDP • UK residential and commercial property to fall 33% in value • Unemployment to surge by 5.6% to reach 11.9% • Unemployment and growth to begin to recover later, but output to remain suppressed relative to 2019 • No further government stimulus during the period What might seem like a near perfect storm of financial stress should, in a normal scenario,causeabankingcrisis. Butnotthis time.

Banks ended 2021 with strong balance sheets rebuilt during the financial crisis and protected by government support for businesses during Covid. Tier 1 capital against which these big banks lend

amounted to 16.5%. Bear in mind that Royal Bank of Scotland went into the financial crisis with a circa 7.3% tier 1 capital ratio which evaporated very quickly due to the financial losses incurred by the bank and its customers. The Bank of England has set a reference rate of capital to show banks today are expectedtoweatherthecurrentstorm. This is circa 7.7%, although it varies depending onthebank. Allbankswereabovethislevel. The charts below show how the stress tests in 2019, 2020 and 2021 came out.

d ) g l a n E n o f k B a n : r c e ( s o u

This shows that the British banking system has twice the capital that the sector had going into t he G lob al Fina ncial Cris is. In addition, th e len ding books are sign ifican tly less lever aged with more sound lending

policies and far better risk mitigation. So Britain can take some considerable comfort fromthestrengthof thebankingsystemand itsabilitytoendureasevereeconomicshock.