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Flagstone Weekly Update - 05 December 2018

5th December 2018


Bank of England: UK Banks can survive a “worst-case” Brexit

The largest UK banks would be able to survive a “worst-case scenario” Brexit, according to the result of the Bank of England’s recent stress tests. The tests included a 4.7% reduction in GDP, unemployment rising to 9.5%, UK property prices falling by a third and a devaluing of the pound.

The tests replicated the scenarios faced last year, when every bank also passed. The Bank stated that the tests encompassed their predictions for the economic shock associated with a no deal, no transition Brexit. The conditions faced by the banks were more severe than the 2008 global financial crisis, but it was found that, even in such a scenario, they would still have, a common equity Tier 1 (CET1) of twice its level before the crisis, on aggregate.

The Bank stated that the banks are, “resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis.”

None of the seven lenders tested; RBS, Barclays, HSBC, Lloyds, Standard Chartered, Santander UK and Nationwide, were told to raise additional capital.

The Governor of the Bank of England, Mark Carney, stated that the results should give people confidence in our banking system and give, “reassurance that even if [the conditions tested] happened, which is not likely, the system is more than ready for it.”

Notice Account Rates hit 6 Year High

The Average notice account available from UK banks has risen to its highest level in 6 years. Research from Moneyfacts has shown that the average, currently standing at 1.07%, is the highest seen since November 2012, when it reached 1.08%, bringing this sector of the savings market into the limelight.

Recent competition for funding between challenger banks caused a flurry of changes to market-leading notice rates in quick succession. The average is 0.07% higher than the beginning of November, with most of these changes occurring in a one-week period, and is more than double the record low of 0.51%, of February 2017. Indeed, at this point last year, the rate was only 0.69%, indicating the impressive rise of this sector of savings, in a short space of time.

However, while the average has risen, the vast majority of notice account rates have seen little change, despite the base rate increase in November. As the notice account market is relatively small, a few providers vying for the top rate can have a dramatic affect on the average. Savers should always be prepared to move their money between accounts, as you can do quickly and efficiently using the Flagstone platform.

Savers can increase returns by up to £135 a year on each £10,000 by switching banks

Big banks hold 9 out of every 10 pounds currently sitting in instant access accounts, despite offering negligible rates, and with better deals to be found elsewhere. Analysis published this week in thisismoney.co.uk has highlighted that whilst there is £735 billion sitting in instant access accounts with UK banks, the vast majority could be better placed with challenger banks, which pay a much better rate of interest, according to the research.

Despite two 0.25% base rate increases in the last year, the largest UK banks are still offering instant access accounts at well below 0.5% interest, with some such as the Halifax Online Saver offering just 0.05%. These accounts are well below the 0.64% average rate for instant access savings accounts.

Roughly £16 billion was paid into accounts offered by the big banks over the past year, raising the total to £644 billion in accounts with them, according to trade body UK finance. This is despite the fact that many challenger banks are offering vastly superior rates.

On the Flagstone platform, for example, there are two instant access accounts offering a rate of 1.40%. Even on relatively small saving pots, the difference can be substantial. Over the course of a year, the difference between paying into an account offering 0.05% and 1.40% for savings of £10,000 is £135. For Savings of £100,000, it would be £1,350.

2018 a year for savers

2018 has been a year where savers are the winners, according to an analysis of interest rates by Moneyfacts.co.uk. Most savings vehicles have had their average increased to a high in December, with some products this month offering the highest rates for several years.

The average instant access account has risen from 0.45% in December 2017 to 0.64% this month, while the average one-year fixed bond rose from 1.19% to 1.47% over the same time period.

Rachel Springall, finance expert at Moneyfacts.co.uk advised that, “right now providers are upping rates to compete and entice prospective savers. This means savers would be wise to shake off any apathy they have.”

"Speed is still a key area for savers to consider, and in 2018 we saw limited edition Best Buys come and go within a matter of weeks... Moving into 2019, it will be no surprise to see more of these accounts surface as providers gauge demand, particularly on easy access deals.”


FTSE European 350 Bank Index rose slightly by +0.3% over the last week

The FTSE European 350 Bank Index rose slightly over the week, up by +0.3% to 3,849 from 3,838, as financial markets await the outcome of discussions between the Chinese and U.S. presidents at the G20 summit in Argentina to see if the two countries can settle their trade differences.

ITRAXX Europe Senior Financials 5-year CDS Index improves marginally by -0.3% over the last week

The ITRAXX Europe Senior Financials 5-year CDS Index spread (series 30) improved only marginally by -0.3% over the last week, to 104.2bps from 104.5bps, as financial markets await the outcome of both the trade talks between President Trump and Chinese President Xi Jinping and the decision of the UK Parliament on the Prime Minister’s Brexit deal on the 11th December.

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