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Bank of England to review how it stress tests banks

by Jessica Weisman-Pitts
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Bank of England to review how it stress tests banks

By Huw Jones

LONDON (Reuters) – Britain’s banking system is well capitalised to withstand shocks the Bank of England said on Tuesday, adding that next year’s annual health check of major lenders will dispense with bank-by-bank results while a “stocktake” of stress testing takes place.

The BoE has been testing the resilience of banks such as Barclays, Lloyds, HSBC and NatWest to theoretical shocks annually for about a decade, typically publishing bank-by-bank results that analysts and markets scrutinise for vulnerabilities.

“The UK banking system is well capitalised, supported by strong recent profitability, and has high levels of liquidity,” the BoE’s Financial Policy Committee said in a statement.

Banks continue to have the ability to support households and businesses as they face a cost of living crisis and rising interest rates, the Bank said.

The BoE said that for 2024, its test would be “desk based” meaning banks would give the Bank details of their balance sheets, allowing it to test resilience using several scenarios.

Only aggregate results will be published, as was the case with an emergency “desk-based” stress test during the COVID-19 pandemic.

Stress tests were introduced after the global financial crisis of 2008 to help plug capital gaps, but in recent years, all banks have fared well, making them more of a tool to check for hidden vulnerabilities rather than determinant for capital levels.

Typically, banks are given one adverse scenario to test themselves against and the Bank said it still intends to return to this format in 2025.

In 2024, however, the Bank will “take stock and update” stress testing, looking at whether more banks should be added.

The BoE left its so-called countercyclical capital buffer, built up during steadier times for release in times of stress, at 2%, although some FPC members suggested a case for raising it.

The FPC also noted a wide range of business models among smaller and medium-sized lenders in Britain, adding that “a more challenging environment could affect these business models in different ways”.

The Bank sought this month to find buyers for struggling smaller lender Metro Bank before it announced a 325 million pound ($397.83 million) capital raise and 600 million pound debt refinancing on Sunday.

($1 = 0.8169 pounds)


(Reporting by Huw Jones; Editing by Tomasz Janowski)