BoE Publishes Key Elements of the 2021 Stress Testing for Banks in UK

The 2021 solvency stress test will assess the major UK banks and building societies against a UK and a global scenario that reflects a severe path for the current macroeconomic outlook. The 2021 solvency stress test will test banks’ end-2020 balance sheets to a scenario similar to that generated by the reverse stress test. The timetable for the 2021 solvency stress test will be staggered. Participating banks will be required to submit projections for credit impairments and credit risk-weighted assets in April, rather than the usual timing of June. This will help inform further analysis by BoE in the first half of the year. The additional stressed projections will be submitted in June, as usual, with bank-specific results published in the fourth quarter of 2021. To help facilitate this change to the usual timetable, and in recognition of ongoing operational challenges within participating banks, banks will not be requested to submit baseline projections and the ring-fenced subgroups of stress-test participants will not be included in the 2021 stress test. Although the qualitative review will continue to be an important component of the 2021 stress test, the scope of this year’s exercise will be adapted according to the situation.

The results of the 2021 solvency stress test will act as a cross-check on the Financial Policy Committee (FPC) judgment of how severe the current stress would need to be to jeopardize resilience of banks and challenge their ability to absorb losses and continue to lend. The test will, therefore, cross-check the judgment that the banking system is resilient to a reasonable worst-case stress in the current environment. It will also support the PRA objective of promoting the safety and soundness of PRA-regulated firms. The outcome of the test will be used to update the FPC judgments 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 transition of PRA back to its standard approach to capital-setting and shareholder distributions through 2021.

Related Links

• Press Release
• Key Elements of Stress Test
• Guidance for Stress Test
• Variable Paths for Stress Test (XLSX)
• Stress Testing Scenarios, Templates, and Taxonomy

Keywords: Europe, UK, Banking, Stress Testing, Credit Risk, 2021 Stress Test, Basel, BoE