The Bank of England (BoE) has published a paper setting out the key elements of the 2017 stress test for the UK banking system. The 2017 stress test includes two stress scenarios. Alongside the annual cyclical scenario, the BoE is, for the first time, running an additional exploratory scenario.

The annual cyclical scenario incorporates a severe and synchronised UK and global macroeconomic and financial market stress, as well as an independent stress of misconduct costs. The size of the shocks to different sectors and economies are adjusted each year to deliver a similar stressed outcome unless the assessment of vulnerabilities warrants a change to that outcome. The results of the annual cyclical scenario are used to ensure that the UK banking system as a whole, and individuals banks within it, have sufficient capital to absorb losses and maintain the supply of credit to the real economy, even in a severe stress.

The aim of the exploratory scenario is to consider how the UK banking system might evolve if recent headwinds to bank profitability persist or intensify. It incorporates weak global growth, persistently low interest rates, stagnant world trade and cross-border banking activity, increased competitive pressure on large banks from smaller banks and non-banks, and a continuation of costs related to misconduct. The test will have a seven-year horizon to capture these long-term trends. The exploratory scenario is not focused on bank capital adequacy but rather how banks would meet regulatory requirements and build sustainable business models in such an environment. Its purpose is to explore the impact of banks’ actions on both the real economy and the future resilience of the system to shocks.

The BoE will publish the results of the stress tests in Q4 2017.

View BoE announces key elements of UK banking stress test 2017, 27 March 2017