On 16 January 2025, the Bank of England (BoE) published a speech on ‘Joining the dots’ between stress tests, delivered by its executive director for financial stability strategy and risk, Nathanael Benjamin, at The City UK.

The speech outlines the BoE’s new approach to stress testing banks and developments in stress tests in other parts of the financial sector. Mr Benjamin also sets out his aspirations for the future, including the importance of joining the dots between exercises to understand system-wide dynamics further.

Background

The BoE released various stress testing publications alongside the Financial Stability Report in November 2024, including its new approach to stress testing the UK banking system which replaces the previous framework (published in 2015) and which the BoE considers a significant step forward for it.

New approach to stress testing banks

Mr Benjamin explains that the BoE’s updated approach combines the predictability of regular stress testing for cyclical risks with the adaptability the BoE has used in recent years to explore different risks. There are three key components to the approach:

  • The BoE will continue to run a financial resilience test of risks related to the financial cycle, involving submissions from participating banks, but it will be every other year. This biennial exercise will be called the Bank Capital Stress Test.
  • In the intervening years, the BoE will supplement its assessment of the banking system’s resilience using stress testing in a less burdensome way, such as through desk-based exercises.
  • Exploratory exercises will continue to be used, involving participation from banks. These will be a means of assessing other risks, including structural and emerging risks that are not closely linked to the financial cycle.

The new approach is intended to be more adaptable and risk responsive, and Mr Benjamin explains that it is possible because banks are now much better capitalised.

‘Joining the dots’

The speech goes on to explain that the BoE has been running relatively separate tests of different sectors (those of banks, insurers, central counterparties and system-wide), but that in the future, it would like to use the new approach to draw together even better its broader toolkit of exercises across sectors to enhance its understanding of system-wide dynamics.

Mr Benjamin explains that the need for this more joined-up approach is greater than ever as the shape of risks to financial stability are evolving fast and with increasing interconnectedness; he therefore flag the need to consider the broader macro picture at the level of the whole financial sector.

The speech concludes with a call for firms across the industry to adopt a similar mindset of joining the dots, noting that the financial system is increasingly interconnected, and participants having open lines of communication with their financial counterparties to understand each other’s reaction function in a stress is very helpful for the resilience of the system as a whole.