LONDON (Reuters) – The Bank of England said on Monday that banks’ ability to deal with rising global interest rates and the resilience of their retail divisions to market shocks would be scrutinized in a “stress test” this year.
The test checks whether banks have enough capital to handle theoretical shocks and aims to avoid a repeat of situations in which taxpayers have to bail out lenders as they did in the global financial crisis more than a decade ago.
The test has been adapted and delayed during the COVID-19 pandemic, but is now back in the annual slot, with results coming out in mid-2023 to help the Bank of England determine capital levels.
“The stress scenario is more severe than the global financial crisis for both the UK and the world,” the Bank of England said in a statement.
With the Bank of England and other central banks raising interest rates to quell high inflation for decades amid the impact of Russia’s invasion of Ukraine, the test will for the first time check the resilience of eight lenders in the face of rising global borrowing costs and not just in the UK.
The eight banks are HSBC, Barclays (LON :), Standard, Lloyds (LON :), NatWest, Santander (BME 🙂 UK, Virgin Money (LON :), Nationwide Building Society.
The scenario – which is closer to a worse situation than the BoE actually forecasts for the development of the economic outlook – covers five years from the end of June 2022, and includes the BoE’s rate hike to 6% early next year and 5%. A drop in British economic output, as well as a 31% drop in home prices.
The Bank of England said it would test the “fenced” retail arms of banks on an independent basis for the first time.
There will be a separate stress test for misbehavior costs.
The Bank of England said: “Banks have been asked to provide firm forecasts of misconduct costs that relate to known misconduct issues and have a low probability of being exceeded.”
The test has no pass or fail mark but an “obstacle” assigned to each bank.