Bank Of England: Key Elements Of The 2021 Stress Test

The Bank of England has published the scenario that we will be stress-testing banks against in 2021.

The 2021 solvency stress test will assess the major UK banks and building societies against a UK and global scenario that reflects a severe path for the current macroeconomic outlook.

The Bank’s approach to concurrent solvency stress testing aims to use periods when the economy is growing to build up banks’ buffers of capital, ready to be drawn on to support the economy in a stress. Once the economy enters a real stress the focus changes. At this point stress tests are used to assess whether the buffers of capital that banks have built up are large enough to deal with how the prevailing stress could unfold.

The results of the 2021 solvency stress test will act as a cross-check on the Financial Policy Committee’s (FPC’s) judgement of how severe the current stress would need to be in order to jeopardise banks’ resilience and challenge their ability to absorb losses and continue to lend. It will therefore cross-check the judgement that the banking system is resilient to a reasonable worst-case stress in the current environment. It will also support the Prudential Regulation Authority’s (PRA’s) objective of promoting the safety and soundness of PRA-regulated firms.

There will be no mechanical link from the results to regulatory response. But the outcome of the test will be used to update the FPC’s judgements about the most appropriate ways in which the banking system can continue to support the economy through the stress. It will also be used as an input into the PRA’s transition back to its standard approach to capital-setting and shareholder distributions through 2021.