Seven banks, representing 75% of lending to the UK economy, are taking part in a ‘hypothetical stress scenario’ designed to test the resilience of the banking infrastructure to withstand economic disaster scenarios; one of the scenarios being a sizeable drop in property prices.
The Bank of England (BoE) have launched the 2025 Bank Capital Stress Test, replacing the pervious Annual Cyclical Scenario (ACS), to assess how well prepared the UK banking system is to deep simultaneous recessions in the UK and global economies, large falls in asset prices, higher global interest rates, and a stressed level of misconduct costs.
The seven lenders taking part are : Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK and Standard Chartered. BoE stress the testing is not a forecast of macroeconomic and financial conditions, instead it is designed to help policy makers in the Financial Policy Committee (FPC) and Prudential Regulation Committee (PRC) to understand the impact of a series of sever, broad and adverse shocks. The results will be used to inform the setting of capital buffers for the UK banking system and individual participating banks, and to inform a broader understanding of risks in the banking system.
The 2025 Bank Capital Stress Test has three components
- a macroeconomic scenario
- a financial markets and traded risk scenario
- a misconduct stress.
The test is in part to help lenders understand their own risk management and ‘absorb rather than amplify shocks’ and have the bandwidth to continue operating.
The macroeconomic scenario involves a series of severe global shocks which have a knock-on impact in the UK including
- UK residential property prices fall by 28%
- UK GDP falls by 5% and world GDP falls by 2%
- UK unemployment almost doubles to a peak rate of 8.5% in the third year of the scenario, similar to the peak level experienced in the global financial crisis.
- World trade falls by 20%;
- Oil and gas prices rise sharply;
- Inflation peaks at 10% before falling back to the 2% target by the end of the scenario;
- Bank Rate is increased to a peak of 8% and is then lowered over the scenario as inflation returns to the target;
The results will be published late this year with BoE saying they expect to undertake similar work every other year.
