On 24 April 2019, the Bank of England (BoE) published a report by its Independent Evaluation Office (IEO) evaluating the BoE’s approach to concurrent stress testing.
The IEO found good evidence that the approach successfully delivers on its principal objective: to provide a forward-looking assessment of banks’ resilience and, linked to that, an orderly and repeatable process for policy committees to inform the setting of firm and system-wide capital requirements. Since the framework has been introduced, the stress tests have allowed the BoE to judge transparently and in some cases demonstrate the need for banks to strengthen their capital positions, in a systematic even-handed way without provoking market disruption.
As the stress-testing framework is still maturing, the IEO believes that there remains some opportunities for refinement, notably:
- advancing macro and micro-prudential objectives: the BoE should adopt a more holistic approach to scenario design by leveraging the expertise of supervisors earlier in the process. The IEO suggests that the BoE considers developing its capability to conduct sensitivity analysis exploring variants of the scenario;
- delivering the annual cyclical scenario (ACS) and biennial exploratory scenario (BES) more effectively: the IEO recommends that the BoE: reviews ACS data requirements with firms and further embed good practice standards into its data collection processes; updates its modelling strategy to reflect a more focused set of priorities over the short and medium term; and undertakes further targeted improvements to One-Bank working and standardisation of its analysis; and
- communicating stress-test outcomes appropriately: the BoE should formalise the external disclosure strategy and use that to consider the case for further public exposure of key judgements and uncertainties; and ensure that sufficient information is provided in feedback to firms to allow them to understand how to remediate any weaknesses identified.