New Lender Stress Tests Revealed by Bank of England

The Bank of England has unveiled plans to stress test banks against a 35% fall in house prices, an eight-fold rise in interest rates and mass unemployment.

The creation of these tests follows a recommendation made by the Financial Policy Committee in March 2013 to help asses capital adequacy at the country’s financial institutions.

The UK stress testing will build on the EU-wide test announced by the European Banking Authority earlier this year. The Bank’s additional tests will focus on specific weaknesses in the UK banking system.

One key test looks at how banks and building societies would cope with a fall in house prices of 35% and a slump in commercial properties of 30%.

In addition financial providers will need to show how they could deal with a rise in interest rates to 4% and unemployment of 12%.

Lenders will need to demonstrate how well they would cope with these scenarios taking place between now and 2016.
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. “

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