On 29 November 2024, the Bank of England (BoE) published its updated approach to stress testing the UK banking system, which will apply from 2025 onwards.

The updated approach is designed to support the statutory objectives of the Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA). It takes into account the material increase in the level of capital in the banking system since the global financial crisis, the changing nature of risks the banking sector faces, and the need to be effective, proportionate and efficient in pursuit of the FPC’s and PRA’s objectives.

The BoE explains that the updated approach, which sits within its broader framework for assessing financial stability and the safety and soundness of individual banks, has 3 key components:

• A Bank Capital Stress Test, which the BoE plans to carry out every other year (a reduced frequency compared to the annual cyclical scenario exercises under the previous approach). This will test the risks related to the financial cycle in which the largest and most systemic UK banks participate and will be used to inform the setting of capital buffers for the banking system and individual banks.

• Other stress tests of cyclical risks (through less burdensome means, e.g. desk-based stress tests), which will be carried out in the intervening years where appropriate to supplement the BoE’s assessment of theresilience of the banking system to risks related to the financial cycle.

• Exploratory exercises, which the BoE will continue to use as a means of assessing other risks, including structural and emerging risks that are not closely linked to the financial cycle. When deciding on the timing of these exercises the BoE will take into account the risk environment and the sequencing and timing of the stress tests explained above.

The updated approach to stress testing the UK banking system will be used by the BoE to provide a range of insights within its broader framework for financial stability and safety and soundness.