BoE has published its approach to stress testing the UK banking system. The approach aims to provide clarity for firms and the wider public about stress testing plans for the next three years to 2018. Key features include:

  • introducing an annual cyclical scenario that will link the severity of the test to the financial cycle systematically;
  • a biennial exploratory scenario covering risks unrelated to the financial cycle that policymakers judge to be emerging or latent threats to financial stability or individual banks;
  • a systematic and transparent hurdle rate framework with clear hurdle rates for each firm reflecting minimum capital requirements and additional requirements for globally systemic banks;
  • incorporating banks with total retail deposits greater than £50 billion into the stress test. Amongst this group of firms, coverage may vary for the exploratory scenario if that scenario is unlikely to impact some firms. UK subsidiaries of foreign-owned investment banks will not be in scope at this time but this will be kept under review; and
  • BoE will further develop its own modelling capabilities to enhance its ability to challenge aspects of firms’ own results and to include in the test results the impact of feedback mechanisms across the banking system. This approach hopes to ensure that there continues to be a range of modelling input into stress testing.

(Source: BoE Publishes Approach to Stress Testing)