The Bank of England has announced that the UK banking system would be fine in the event of the UK crashing out of the EU without a deal.
Pardon me if I’m not comforted.
My problem with the announcement is in two parts.
First, there is my natural reticence to believe any prediction about the future path of any mechanism as complex as the banking system. Stress tests are fine in themselves but they can never fully model the baffling interconnections and rising panic of a real crisis. Who is to say what would really happen if the UK left the EU in a ‘disorderly Brexit’?
Admittedly some of the parameters that the bank of England used in the stress test were completely hair raising. They certainly didn’t stint in their gloominess: GDP collapsing 4.7%; residential property prices down 33%; Commercial property prices down 40%; interest rates up 4%. Most eye-catching and brutal of all from my perspective as an old FX dealer: a cable rate of 0.85 $/£ – the lowest rate in history.
All in all, the bank modeled a worse economic impact than the great financial crisis of 2007 / 2008. Now, to be fair, a ‘disorderly Brexit’ wasn’t explicitly modeled. To reiterate: we can’t know what effect it would really have. And according to Mark Carney hard Brexit would be no worse than the stress test. Phew.
But it would be painful. Some impacts are relatively easy to predict: a sudden precipitous exit would be accompanied by all sorts of travel and trade chaos: trucks backed up at Dover, hours of queuing at airports, lost and delayed packages, the lot.
Happy talk of trading using the WTO rulebook ignores the complexity of doing so (a friend of mine who is an expert on textiles told me that the WTO rules relating to cotton trading alone run to almost 100 pages) and the delay and confusion there would be in implementing the rules.
So, although the Bank of England announcement is comforting on one level (at least bank capital didn’t look obviously inadequate), the fact that the BoE is explicitly linking the severity of the tests to the effects of a chaotic Brexit is the source of my real concern.
Why? For one thing, because if the members of the UK’s establishment (BoE, Treasury, Cabinet) think that this economic ‘worst case’ is even remotely realistic, they know they simply can’t afford for it to happen. It would be a disaster of historic proportions.
And if they can’t afford for it to, why even risk it in the course of negotiations with the EU? Both sides know ‘no deal’ shouldn’t happen but, in the event, only one side really loses. It’s like trying to negotiate a pay rise while realising that if you and your employer don’t reach agreement you’ll get your head blown off.
You’re in bad shape; they just have a stiff dry cleaning bill to remove your brains from the front of their suit.
So, for me, what this morning’s discussions after the Bank of England announcement emphasise – as if emphasis is really needed – is that one country with a population of 65 million is at a massive disadvantage when negotiating with a group of 27 nations with a combined population 4 or 5 times larger. There are pitifully few cards that can be played by the UK team.
All of which makes me both worried and pissed off. Worried that, through ideological intransigence (on both sides), sloth or just plain old incompetence the ‘disorderly Brexit’ path might become an unwanted reality. It would be the economic equivalent of the unintended slide to war in 1914. Nobody wants it but it happens regardless.
And pissed off that my country is at this point at all. That it is possibly about to commit: ‘The greatest act of unforced economic self harm in history’.
Ah well, rant over. Now I’ll cross my fingers and take some Valium.