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News: Bank of England reveals stress test plans for UK lenders

Fri, 02 May 14


Stress tests will be carried out on the eight major UK banks and building societies this year. It will be built on the EU-wide stress test, announced in January 2014 by the European Banking Authority (EBA), which will assess the resilience of EU banks under a common adverse scenario and which provides for national variants. The Bank of England will add a number of additional UK layers to explore particular vulnerabilities facing the country’s banking system.

The tests follow widespread concern over the UK housing market, with some fearing a house price bubble driven by the government’s schemes designed to encourage high lending on the back of low deposits. Indeed, the Mortgage Market Review was implemented last week to minimise the risk of lending to those who cannot afford a mortgage. The stress tests will help shore up stability and confidence in the lenders themselves.
 
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 problems, including recommendations to the PRA and Financial Conduct Authority.

Mark Carney, Governor of the Bank of England, said: “Much has been achieved in recent years to put the UK banking system on a sounder footing, so that it can support the UK recovery. The challenge now is to secure a strong, sustainable and balanced economic expansion. The Bank’s annual stress test will help ensure our banks support that expansion by remaining resilient. Today’s announcement represents a major step in that new framework.
 
"Although the events depicted in this stress-test scenario are extreme, and thus highly unlikely to transpire, by bringing together the micro-prudential standards for banks with a macro-prudential assessment of the tail risks to which they must be resilient, the Bank is working to ensure that the UK financial system remains one that absorbs rather than amplifies shocks.
 
"Furthermore, this stress test demonstrates the benefits of acting as One Bank. The test is the result of close co-operation between the PRA, the FPC, and the macro forecasting units in Monetary Analysis, and also between a range of Bank of England officials and their counterparts across Europe.”

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