On 16 March 2018, the Bank of England (BoE) published the scenario that it will be stress-testing banks against in 2018. The BoE will conduct one stress test, the annual cyclical scenario. The seven banks and building societies taking part in the 2018 stress test account for around 80% of the outstanding stock of PRA regulated banks’ lending to the UK real economy.
The stresses applied to the economic and financial market prices and measures of activity in the 2018 annual cyclical scenario will be the same as in the 2017 test. This means the scenario remains more severe than the global financial crisis and, in the judgement of the Financial Policy Committee, encompasses a wide range of UK macro-economic outcomes that could be associated with Brexit.
The hurdle rates for the 2018 test will evolve from those used in earlier years in four important ways: (i) the BoE will hold banks of greater systemic importance to higher standards; (ii) hurdle rates will incorporate buffers to capture domestic systemic importance as well as global systemic importance; (iii) the calculation of minimum capital requirements incorporated in the hurdle rates will more accurately reflect how they would evolve in a real stress; and (iv) adjustments will be made to reflect the increased loss absorbency that will result from higher provisions in stress under the new IFRS 9 accounting standard.