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BoE reveals stress testing for UK banks
29 April 2014
Follows proposed medium-term stress testing framework in last October’s discussion paper
Bank of England
The Bank of England has released details of how it will
stress test eight major UK banks in the future.
The announcement is the central bank’s move
towards its medium-term stress testing framework, which it
proposed in a discussion paper last October.
"Much has been achieved in recent years to put the UK banking
system on a sounder footing, so that it can support the UK
recovery," said Mark Carney, the bank’s
"The challenge now is to secure a strong, sustainable and
balanced economic expansion. The Bank's annual stress test will
help ensure our banks support that expansion by remaining
resilient. Today's announcement represents a major step in that
The stress testing exercise for 2014 will be based on the EU
stress test but will include "additional UK layers" that will
look at weaknesses particular to the UK banking system.
The EU stress test assesses the resilience of EU banks under a
common adverse scenario, allowing for some variances across
The UK central bank mentioned that it would calculate the
ability of banks to withstand risks, predominately rising
interest rates and housing market shocks.
"Although the events depicted in this stress-test scenario are
extreme, and thus highly unlikely to transpire, by bringing
together the microprudential standards for banks with a
macroprudential assessment of the tail risks to which they must
be resilient, the Bank is working to ensure that the UK
financial system remains one that absorbs rather than amplifies
One of the main thresholds for the UK variant test will be set
at 4.5% of risk-weighted assets (RWAs), to be met with Common
Equity Tier 1 capital in the stress – using a CRD IV
end-point definition of CET1 in line with the UK implementation
of CRD IV.
The central bank said that if a bank’s capital
ratio falls below 4.5%, it is strongly presumed that the UK
Prudential Regulatory Authority would require it to take action
in bolstering its capital position. Although, the PRA might
still require some firms to increase capital positions even if
they meet the threshold.
To judge whether action would need to be taken, the regulator
would look at a firm's leverage ratio, Tier 1 and total capital
ratios on a risk-adjusted basis, the adequacy of its recovery
and resolution plans and the extent to which potentially
significant risks are not quantified adequately or fully as
part of the stress.