April 24, 2019

BoE published a report on the evaluation, by the Independent Evaluation Office (IEO), of the effectiveness of the approach of BoE to concurrent stress testing. Also published is the response of BoE to this evaluation. The IEO report finds that the approach is successfully delivering on its principal objective and recommends a number of ways that the stress tests could be improved further. IEO has set out ten recommendations around three main themes. The evaluation was primarily conducted between June 2018 and January 2019.

The recommendations of the IEO fall under three themes. The first paves the way for more value to be extracted from this resource-intensive exercise, through suggestions to advance macro- and micro-prudential objectives. The second theme provides insights to guide BoE in enhancing delivery further by building efficiency and effectiveness. The final theme reflects on the challenges associated with communicating the stress test outcomes. It makes recommendations for ensuring that internal, public, and bilateral firm communications all support stress testing objectives to the fullest extent possible. 

The report shows that concurrent stress testing is delivering value to policymakers, participating firms, and the industry more broadly. It serves both Financial Policy Committee (FPC) and Prudential Regulatory Committee (PRC) needs by providing insights into risks affecting the system and a common and comprehensive scenario to compare firms against one another. This allows policy making to be well- integrated and well-evidenced, which in turn supports significant credibility and accountability benefits. The openness of the exercise has proven to be particularly useful recently, as the tests have allowed BoE to communicate its view of the resilience of the banking system under various Brexit scenarios. However, the stress-testing framework is still maturing and, in this context, the IEO has seen some opportunities for refinement. 

BoE is committed to implementing all of the recommendations by IEO. The BoE response to these recommendations details how BoE will respond to most of these recommendations. A small number of recommendations will require further work and BoE will report on these later in the year, as part of an update to its "approach to stress testing" document. The Annex to the BoE response summarizes the actions proposed by BoE. In February 2018, BoE's Court of Directors commissioned the IEO to conduct an evaluation of the effectiveness of BoE's approach to concurrent stress testing. The Court considered that an IEO evaluation at this juncture was appropriate, particularly as BoE was planning to review and update its approach to stress testing in 2019.

 

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Keywords: Europe, UK, Banking, Stress Testing, Concurrent Stress Testing, Recommendations, Brexit, IEO, BoE

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