Stress tests are here to stay, are you prepared?

On 16 December, the Bank of England published the results of its first ever ‘concurrent’ stress testing exercise of the UK banking system. The new stress-testing framework builds on the previous approach taken by the Prudential Regulation Authority (PRA) and the Financial Services Authority (FSA) before that.

This year’s stress tests are the first of a new annual process by the regulator as it attempts to ensure that the financial sector can survive a severe macro shock.

Narrative

The economic scenario applied in the stress test was severe and if realised would result in the worst UK crisis since the First World War. The narrative allowed for a long period of stagflation with house prices plunging 35%, a jump in interest rates to 4%, a 3.5% fall in gross domestic product; coupled with commercial real estate prices falling 30%, unemployment surging to 12.0%, and inflation climbing to 6%.

Scope

The eight banks and building societies tested as part of this exercise were Barclays Bank, Co-operative Bank, HSBC Bank, Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland, Santander UK and Standard Chartered.

Results

Following the stress testing exercise, the PRA Board judged that, as at end-2013, three of the eight participating banks (Co-operative Bank, Lloyds Banking Group and Royal Bank of Scotland) needed to strengthen their capital position further. But, given continuing improvements to banks’ resilience over the course of 2014 and concrete plans to build capital further going forward, only one of these banks (Co-operative Bank) was required to submit a revised capital plan.[1]

Experian’s expertise

The Bank and PRA have made clear that going forward they will be extending the scope of the annual stress tests to include more banks and building societies.

Our comprehensive macroeconomic forecasting capability allows us to undertake regulatory and client-specified scenario exercises at a national, regional and segmented household level/ Scenario analysis can be carried out by Experian, using our own suite of models.

Our previous article covering whether your portfolio can withstand stresses, may be of interest to you: view here. Learn more about our capabilities here. Alternatively, our webinar which is available on-demand – watch it here.



[1] http://www.bankofengland.co.uk/publications/Pages/news/2014/169.aspx