The Bank of England has released its 2015 plans to test the reactions of the UK’s biggest banks to a future global economic crisis.
The central bank said stress tests for banks would include for the first time assessments of how lenders’ leverage and capital ratio would emerge from an economic crisis. The aim is to ensure that the UK banking system can “absorb rather than amplify” severe shocks and continue to provide financial services to the real economy.
In the 2015 tests, lenders must meet up to 25 per cent of Tier 1 capital using relevant additional Tier 1 instruments, the BoE said.
As in the 2014 tests, a firm’s capital ratio should not fall below the 4.5 per cent Common Equity Tier 1 and 3 per cent Tier 1 leverage ratio thresholds or the lender would have to strengthen its capital position. However, the 2015 tests will have some qualitative differences from the first tests of 2014, the BoE said in its report.
The 2015 stress tests will look at UK financial vulnerability in a global scenario rather than focusing only on domestic risks.
Among the global risks, the central bank will examine the impact of a collapse in Chinese growth, a deep eurozone recession and a liquidity crunch in emerging markets.
BoE governor Mark Carney says: “By assessing the resilience of the UK banking system against a major external shock, we will improve further our ability to identify vulnerabilities and ensure that banks have plans in place to address a wider range of possible stresses.”
This year’s tests will also look at the deflationary macro-economic environment and put more emphasis on exploring risks stemming from UK banks’ domestic corporate exposures.
The BoE will publish the results of the 2015 stress tests alongside the Financial Stability Report in December.