UK banks will face annual stress tests for the first time to see if they could survive a major collapse in financial markets or the economy, the Bank of England said today.
The results of these stress tests will be made public, and if they are found wanting banks will have to show what they have done to bolster their balance sheets.
UK banks could be required to hold more capital than their international rivals, as the Bank said: “At the very least, banks would need to maintain sufficient capital to be able to absorb losses in the stress scenario and not fall below internationally agreed minimum standards.”
Mark Carney, the Governor of the Bank, said: “This will materially strengthen the Bank’s analytical capability to assess risks to resilience. Our intention is that stress testing evolves into an essential component of our prudential framework, complementing our capital and liquidity standards.”
The Bank made it clear that as stress tests come in, following today’s discussion document, they will not be used to give mere “pass or fail” results. Rather, the Bank, through its financial policy committee and the Prudential Regulation Authority, would be able to order individual banks to increase their capital in specific areas and even demand management changes.
The new regime is designed to avoid a repeat of the banking crisis in 2007 and 2008 which led to the £65 billion taxpayer bailouts of Royal Bank of Scotland and Lloyds Banking Group and the nationalisation of Northern Rock and Bradford & Bingley. The old Financial Services Authority carried out one-off tests following the financial crisis.
Deputy Governor Paul Tucker, pictured, said: “We believe that a stress-testing regime can enhance the quality of the Bank’s macro and micro prudential supervision and, over time, underpin confidence in the banking system.” He emphasised that stress testing would help to make the Bank accountable to the public through Parliament. This was vital, given the new stronger powers which the Bank has been given to supervise individual banks and building societies. He said: “To have such power with limited transparency would be uncomfortable.”
The Bank plans to run stress tests which apply across all banks and also to tailor ones to individual banks with a range of scenarios including sharp falls in share and bond prices or a sudden shift in unemployment rates.