The Bank of England's (BoE) 2015 stress tests for the banking sector will assess its resilience to global economic events.
The following elements will be incorporated into the testing this year:
A synchronised global downturn affecting Asia and the euro area in particular, and amplifying global disinflationary pressures;
Severe financial market stress with a reduction in global risk appetite, particularly in indebted economies, reductions in market liquidity, and some defaults of counterparties; and
A slowdown in the UK driven by the downturn in its trading partners, fall in confidence, and correction in market risk appetite. Additional monetary stimulus is pursued in the UK and elsewhere, lowering and flattening yield curves.
The testing scenario has been agreed by the Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA). Banks and building societies' performance in the stress scenarios will be measured against two key capital adequacy thresholds: a 4.5% CET1 risk-weighted capital ratio and a 3% Tier 1 leverage ratio.
CET1 ratio is Common Equity Tier 1 and is the measurement of a bank's core equity capital compared with its total risk-weighted assets – it is the measure of a bank's financial strength.
Tier 1 leverage ratio is the relationship between a banking
organization's core capital and total assets.
If the exercise reveals inadequate resilience at the level of the
system, the FPC will consider a variety of actions, depending on
the sources of potential risks, including recommendations to the
PRA and Financial Conduct Authority.
The BoE will publish the results of the 2015 stress test alongside the Financial Stability Report in December 2015.
Mark Carney, Governor of the Bank of England, said: 'This year's test will have a different focus and is equally important. By assessing the resilience of the UK banking system against a major external shock, we will improve further our ability to identify vulnerabilities and we will ensure that banks have plans in place to address a wider range of possible stresses.'
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
