UK banks to face tougher stress tests

The Bank of England said on Wednesday that the tests will include banks with total retail deposits of over £50bn, which covers the same set of firms included in the 2015 stress tests.

The BoE said the six biggest banks – Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander UK and Standard Chartered – along with building society Nationwide, will need more capital in order to pass the test, which will have a clear hurdle rate for each firm.

The bank also announced the introduction of an annual cyclical scenario that will link the severity for the test to the financial cycle systematically.

“The severity of this scenario will increase as risks build and decrease after those risks crystallise or abate. This systematic approach should mean that markets and banks will be better able to anticipate the broad shape and severity of the scenario over time,” said the bank.

In addition, banks will have to be face an assessment every other year to explore a wider range of risks that might threaten financial stability.

For example, it could explore a set of structural macroeconomic developments that are unusual from a historical perspective, such as the persistent deflationary pressures that were a feature of the 2015 scenario. Or it could be used for a more detailed test of the asset quality of particular sectors, for example buy-to-let mortgages, or exposures to vulnerable countries or regions.

Bank of England governor Mark Carney said: “The Bank of England is taking steps to ensure we can assess a range of future risks from a number of different sources to inform our micro- and macro-prudential policy decisions. Our approach embodies a comprehensive and detailed approach, a desire to deepen and strengthen our analysis, and the flexibility to respond to changing risks.”