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The scenario has been agreed by the Financial Policy Committee (FPC) and Prudential Regulation Authority (PRA) Board.
The test ensures that the UK financial system is one that absorbs rather than amplifies shocks. Stress testing makes up one of the three pillars of the Bank of England’s framework to assess capital adequacy, alongside risk-weighted capital requirements and a leverage requirement.
The 2015 stress test will assess the resilience of the UK banking system to a deterioration in global economic conditions. The stress scenario is not a forecast of macroeconomic and financial conditions in the United Kingdom or other countries, nor is it a set of events that is expected, or likely, to materialise. Rather, it is a coherent, ‘tail-risk’ scenario that has been designed specifically to assess the resilience of UK banks and building societies to a severe shock.
This year’s stress scenario incorporates the following elements:
Banks’ performance in the stress scenario will be reviewed against two key capital adequacy thresholds: a 4.5% CET1 risk-weighted capital ratio and a 3% Tier 1 leverage ratio. Up to 25% of Tier 1 capital can be met using relevant additional Tier 1 (AT1) instruments.
The Bank of England will publish the results of the 2015 stress test alongside the Financial Stability Report in December.
Mark Carney, Governor of the Bank of England, said:
“Last year’s stress tests demonstrated how much stronger the core of the UK financial system has become since the financial crisis. The results showed that the post crisis reforms have put the UK banking system on a stronger footing and made it better able to support the real economy even in the face of a major domestic shock. This year’s test will have a different focus and is equally important. By assessing the resilience of the UK banking system against a major external shock, we will improve further our ability to identify vulnerabilities and we will ensure that banks have plans in place to address a wider range of possible stresses.
As a forward looking regulator our job is never complete. Our focus is clear. To promote the good of the people of the United Kingdom, we are committed to ensuring that our major banks are resilient, that they can weather shocks without calling on taxpayer support, and that they can continue to lend even in adverse conditions. This year’s stress tests will build on last year’s work and advance our medium-term stress testing framework.”
Stress testing the UK banking system: key elements of the 2015 stress test
Stress testing the UK banking system: guidance for participating firms
Stress testing the UK banking system: key elements of the 2014 stress test
A framework for stress testing the UK banking system - A Discussion Paper