Laura WilesBoE has published the results of its 2022/23 stress test of the UK banking system. The test scenario was more severe than the 2007-08 financial crisis and substantially more severe than the current macroeconomic outlook.
The results showed that the major UK banks would be resilient to a severe stress scenario that incorporated persistently higher advanced-economy inflation, increasing global interest rates, deep and simultaneous recessions in the UK and global economies, with materially higher unemployment and sharp falls in asset prices. The headline results were that stress reduces capital positions significantly through a number of channels, but the system remained well above its aggregate hurdle rate.
The aggregate capital drawdown of 3.5 percentage points was smaller than the results of the 2019 test, which was 5.2 percentage points. This reflected a combination of factors, including improvements in banks’ balance sheets, which more than offset the impact of a higher cost of living and interest rates. Banks also began the stress test with higher deposit balances than recent years, leading to larger increases in net interest income as interest rates rise (and to a higher level than in the 2019 test) in response to higher inflation.
For the first time this year, BoE assessed the ring-fenced subgroups of participating banks on a standalone basis where they differed materially from the group. It found that no individual bank was required to strengthen its capital position as a result of the test.