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BoE sets out stress test for UK banks

02 May 2014

The Bank of England (BoE) has set out stress testing for the UK banking system.

Involving eight of the UK’s biggest banks and building societies, the stress test will be based on the EU-wide test that was announced by the European Banking Authority (EBA) in January 2014.

EBA’s test consists of assessing the resilience of EU banks under a common adverse scenario. Running alongside this, the BoE will add a number of additional UK layers to the stress test to explore particular vulnerabilities facing the UK banking system.

The UK variant stress scenario is not a forecast or expectation by the Bank of England regarding the likelihood of a set of events materialising but is a coherent, ‘tail risk’ scenario that is designed specifically to assess the resilience of UK banks and building societies, predominantly to a very severe housing market shock and to a sharp rise or snap back in interest rates.

Results of its stress test will be published by the BoE after they have been through the appropriate governance channels including the FPC and Prudential Regulation Authority (PRA) board towards the end of this year.

Bank of England governor, Mark Carney, said: ‘The challenge … is to secure a strong, sustainable and balanced economic expansion. The [BoE]'s annual stress test will help ensure our banks support that expansion by remaining resilient. Today's announcement represents a major step in that new framework.

‘Although the events depicted in this stress-test scenario are extreme, and thus highly unlikely to transpire, by bringing together the micro-prudential standards for banks with a macro-prudential assessment of the tail risks to which they must be resilient, the Bank is working to ensure that the UK financial system remains one that absorbs rather than amplifies shocks.’

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