Moody's: Severe recession would deplete UK banks' capital

In its latest report on the UK banking system, the US rating agency, Moody's Investors Service noted that, “the UK's banking sector would see significant capital losses in the event of a worse-than-expected macroeconomic downturn following the vote to leave the European Union.”

Key Points:

“The research assumed a hypothetical scenario where the UK economy enters a recession, rather than maintaining the weaker but still positive growth set out in Moody's most recent forecasts”

"It is important to understand how changes in broad economic conditions could affect banks over time" 

“In the downside scenario, the asset quality of UK banks deteriorates significantly, with the ratio of non-performing loans (NPLs) rising to 4.9% in 2018 from 2% in 2015”

“However, in this scenario, the UK banking sector as a whole also remains relatively well capitalised, with the weighted average tangible common equity capital ratio declining to 10.9% in 2018 from 16.2% in 2015, a fall of 5.3 percentage points”

“This outcome implies that -- all other things being equal -- banks would need GBP68 billion to restore their capital ratios to levels seen at the end of 2015, under the downside scenario”

"While this would represent a significant deterioration in banks' solvency metrics, it would still leave the UK banking system close to its G7 peers in terms of aggregate capital ratios"