Bank of England launches latest Bank Capital Stress Test

The test involves a hypothetical "tail risk scenario" designed to assess the resilience of the banking system against severe economic shocks. This scenario includes deep, simultaneous recessions in both the UK and globally, significant falls in asset prices, higher global interest rates, and elevated levels of misconduct costs.

The stress test will support both the Financial Policy Committee and the Prudential Regulation Committee in evaluating the ability of UK banks to withstand a range of adverse conditions. Its primary aim is to enhance financial stability and promote the safety and soundness of the UK banking system.

Under the scenario, UK GDP is expected to fall by five percent in the early stages, while global GDP will decline by two percent. Unemployment will peak at 8.5% in the third year – comparable to levels seen during the global financial crisis.

Inflation is projected to rise to a peak of 10% before gradually returning to the Bank of England’s two percent target by the end of the scenario. Bank rates will increase to a peak of eight percent, before being reduced as inflation returns to target.

The scenario also includes a 20% fall in world trade, a 28% drop in UK residential property prices, and a sharp rise in oil and gas prices.

The results of the stress test will be informed by estimates from both the Bank of England and the participating banks. The findings will be published in the final quarter of this year.

These outcomes will be used to guide the setting of capital buffers for the UK banking system and individual banks, while also contributing to a broader understanding of risks within the financial sector.

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