BoE Publishes Key Elements of the 2021 Stress Testing for Banks in UK
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test. BoE also published the data templates and dictionary for the solvency stress testing and taxonomy for the XBRL concurrent stress testing exercise for 2021. The 2021 stress test will cover the eight listed major banks and building societies: Barclays, HSBC Holdings, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK Group Holdings, Standard Chartered, and Virgin Money UK. Although ring-fenced subgroups are not in scope for the 2021 stress test, BoE expects to include the ring-fenced subgroups of stress test participants in the 2022 test.
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
Featured Experts
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Nihil Patel
Data scientist; SaaS product designer; credit portfolio analyst and product strategist; portfolio modeler; correlation researcher
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
