The Bank of England said top UK lenders would remain resilient even 'if economic conditions turned out to be much worse than we expect'
The Bank of England said top UK lenders would remain resilient even 'if economic conditions turned out to be much worse than we expect' AFP

Britain's top lenders have passed stress tests to show they can withstand a major economic shock, even as rising interest rates pressure the financial system, the Bank of England said Wednesday.

The British central bank revealed the outcome of its annual assessment alongside its report on financial stability.

"We recently tested the major UK banks using a severe stress scenario that is much worse than the economic outlook we expect," the BoE said in a statement.

"The results of this stress test showed that the UK banking system would continue to be resilient, and be able to support households and businesses, even if economic conditions turned out to be much worse than we expect."

The doomsday scenario included UK inflation striking 17 percent, the unemployment rate hitting 8.5 percent, house prices collapsing by almost a third and the world plunging into a deep recession.

The eight biggest UK banks -- Barclays, HSBC, Lloyds, Nationwide, NatWest, Santander UK, Standard Chartered and Virgin Money -- would survive such an economic storm without triggering another global financial crisis, according to the assessment.

The BoE has ramped up interest rates 13 times in a row to the current level of five percent in an attempt to dampen stubbornly-high inflation.

The move has sparked mortgage turmoil as commercial lenders lift their own rates on home loans, worsening a cost-of-living crisis.

Households are likely to face further difficulty this year as the debt burden increases.

BoE Governor Andrew Bailey, speaking at a press conference, warned that there "will be consequences" of higher interest rates on borrowers.

Almost one million households will see their monthly mortgage payments rise by at least GBP500 ($646) per month by 2026, according to the bank's report.

"Higher interest payments on loans mean some borrowers may struggle with their repayments, which increases the risks faced by banks," it noted.

"But UK banks are resilient and are strong enough to support their customers."

Despite aggressive rate hikes since late 2021, UK inflation stands close to nine percent -- which is far above the BoE's official two-percent target.

The central bank added that "significantly" higher interest rates and recent markets volatility had "created stress in the financial system".

High-profile failures of three mid-sized US banks, as well as global titan Credit Suisse, had "caused a material rise" in risk and volatility -- but with "limited" UK fallout.

"Nonetheless, elements of the global banking system and financial markets remain vulnerable to stress from increased interest rates, and remain subject to significant uncertainty, reflecting risks to the outlook for growth and inflation, and from geopolitical tensions," the BoE added.