On 27 June 2024, the Bank of England (BoE) announced that it would be carrying out a desk-based stress test in 2024, which will test the resilience of the UK banking system to two hypothetical scenarios including severe but plausible combinations of adverse shocks to the UK and global economies.  

The exercise will not involve firm submissions of stressed projections but will instead use the BoE’s own estimates of the impact of the stress scenarios on the resilience of the UK banking system.

The scenarios

The two hypothetical scenarios are countercyclical and linked to the Financial Policy Committee’s assessment of the underlying level of risks and vulnerabilities in the UK and global economies and financial markets. The scenarios are:

  • The supply shock scenario, which sees a severe, negative global aggregate supply shock from an increase in geopolitical tensions and global commodity prices and supply-chain disruptions. This leads to higher-than-expected inflation across advanced economies. High inflation is assumed to lead to expectations of higher inflation in the future and global policymakers increase interest rates to bring inflation back to target. In this scenario, the Bank Rate rises to 9% and stays there for a year.
  • The demand shock scenario, which sees a severe negative global aggregate demand shock and global recession, resulting in falling inflation. This prompts the Bank Rate to fall rapidly from 5.25% to 0.1%, remaining below 0.5% for two years, to support the recovery and return inflation to target.

In both scenarios, there is a domestic and global recession, with UK GDP falling by 5%, unemployment rising to 8.5%, and house prices falling by 28%. World GDP falls by 3%. The macroeconomic scenario results in sharp moves in other asset prices. There are assumed to be further falls in UK and global commercial real estate prices, equity prices fall, government bond term premia rise, and corporate bond spreads widen.

The BoE emphasises that these scenarios are not a forecast of macroeconomic and financial conditions in the UK or abroad, and rather that they are designed to be severe and broad enough to assess the resilience of the UK banking system to a range of adverse shocks.

Next steps

The BoE plans to publish findings from the desk-based stress test at an aggregate level by the end of 2024. It has confirmed that it will not publish results at the level of individual banks.