BoE says banks can handle a disorderly Brexit but other risks remain

A commercial property slump, high household debts and a blow-up in China are all on the risk register for the Bank of England alongside Brexit in its latest financial stability report.

The twice-annual assessment of the threats facing the UK point to “stretched” property values, particularly in the West End, where it highlights fears of a 5% fall in prices by the end of 2019.

It said the London market was “particularly vulnerable to possible price falls given the large pipeline of supply and an elevated risk of falling demand were firms to relocate from the UK due to Brexit”.

It adds that despite a recent slight slowdown, growth in consumer credit “remains rapid” and “lenders have been underestimating” potential losses. In its stress tests, consumer credit represented just 7% of banks’ exposures but accounted for 40% of loan losses.

Meanwhile, the exposure of UK banks in China and Hong Kong has risen “substantially” since 2007, with loans and other assets there worth almost double the total equity buffer held by the banking system. China’s growth has been fuelled by debt and the pace of credit expansion is more rapid than in the US before the 2008 crisis and in Japan before the 1990 crash.