31 October 2014
The Bank of England (BoE) is set to follow in the European Banking Authority’s (EBA) footsteps with the results of its UK stress test.
The BoE states that the 2014 UK stress testing exercise builds on the EU-wide stress test by exploring particular vulnerabilities facing the UK banking system. The results of the UK-specific stress test will be published on Tuesday 16 December.
It has been emphasised by the central bank that the EBA results should not be interpreted as indicative of the UK results, nor should the results of the UK stress test be inferred from the EBA results.
The EBA stress test and UK variant stress test are complementary, but there are a number of significant methodological differences between the two, which includes the following:
Balance sheet assumptions: the EBA test uses a static balance sheet. The Bank of England stress test uses a dynamic balance sheet definition, so that the size and composition of banks’ balance sheets are allowed to vary throughout the scenario. Simple read-across therefore cannot be made.
Income and expense: the EBA applies simple income-caps and expense-floors. The UK exercise does not apply these caps and floors so income could increase and expenses could fall.
UK house-price fall in both stresses: it is not possible to infer the impact of the housing stress for the UK test from the EBA results. This is because additional house price falls (as seen in the UK test) do not necessarily have a linear effect on impairments.