The Bank of England will begin stress testing the UK’s seven largest banks and construction societies to study its resilience against severe market shocks.
The central bank said the tests involved how lenders bear “simultaneous recession in the UK and global economies, sharp decline in asset prices, higher global interest rates and low-pressure misconduct costs”.
One of these situations involves a 28% drop in UK housing prices.
Barclays, HSBC, Lloyds Bank Group, National, Natwest Group, Santander UK and Standard Chartered will participate in the study. These institutions account for 75% of the UK’s actual economic loans.
It added that the purpose of the plan is to “enhance financial stability and promote the security and soundness of UK banks.
“By doing so, the goal of the bank is to ensure that the bank can absorb rather than expand the impact and be able to continue to serve families and businesses in the UK”.
The analysis will be conducted every two years, replacing the annual cyclical scenarios that are conducted every 12 months and will be monitored by the Financial Policy Committee and the Prudential Supervision Committee.
Part of the financial disasters tested include:
- UK residential real estate prices fall 28%
- In the early stages of the scene, UK GDP fell by 5%
- World GDP fell by 2%
- In the third year of the situation, the UK’s unemployment rate almost doubled to 8.5%, similar to the peak levels experienced during the global financial crisis
- World trade fell by 20%
- Oil and gas prices rise sharply
- At the end of the scenario, inflation reaches 10%, then drops to the target of 2%.
- Bank interest rates increase to a peak of 8%, and then decrease as inflation returns to target
Rahul Choudhary, director of risk at Broadstone, said the assessment “follows global economic shocks such as the global pandemic, surge in interest rates and a large number of volatility in the market, currency and supply chains.
“In this case, many stress tests such as sudden drop in global or UK GDP, sharp price increases in oil and gas, and the real estate collapse seems more relevant.
“The bank has committed to stress testing every other year, which should be guaranteed around the flexibility and capital strength of the UK banking industry.”
The bank said the results will be released in the fourth quarter of this year and will be “used to inform the UK banking system and individual participation in banks’ capital buffer settings and to gain a broader understanding of risks in the banking system”.
