Laura WilesThe BoE has set out its approach to stress testing the UK banking system from 2025 onwards, which will sit within its broader framework for assessing financial stability and the soundness of individual banks.
The BoE expects to carry out a Bank Capital Stress Test every other year to assess risks related to the financial cycle in which the largest and most systemic UK banks participate. This test will be used to inform the setting of capital buffers, at a reduced frequency relative to that of the annual cyclical scenario exercises under the previous approach.
In the intervening years, the BoE will use stress testing when appropriate to supplement its assessment of the resilience of the banking system. The BoE plans for this to be a less burdensome process than the Bank Capital Stress Tests, conducted for example through desk-based exercises.
The BoE will continue to use exploratory exercises to assess other risks, including structural and emerging risks, not closely linked to the financial cycle. The timing of these will take into account the risk environment and timing of the above stress tests.
The updated approach comes after the BoE published the results of its system-wide stress test on approximately 50 firms, including banks.