Bank of England unveils plan for 2015 'stress tests' on UK banks

The Bank of England on Monday outlined fresh plans to assess the UK's banks in the event of another global economic crisis.The new plan will be applied to the largest UK banks and building societies.The BoE said the purpose of the test is to ensure that the UK banking system can withstand a severe shock and continue to provide financial services to the real economy."It ensures that the UK financial system is one that absorbs rather than amplifies shocks. Stress testing makes up one of the three pillars of the BoE's framework to assess capital adequacy, alongside risk-weighted capital requirements and a leverage requirement," said the BoE.The central bank added that the stress scenario is not a forecast of macroeconomic and financial conditions in the UK or other countries, nor is it a set of events that is expected, or likely, to materialise."Rather, it is a coherent, 'tail-risk' scenario that has been designed specifically to assess the resilience of UK banks and building societies to a severe shock," the BoE said.Barclays, Lloyds Banking Group, Royal Bank of Scotland, Santander UK, HSBC, Standard Chartered and Nationwide will all be reviewed against two key "thresholds" in the stress scenario: a 4.5% common equity tier one capital ratio and 3% tier one leverage ratio.The Co-operative Bank, the only failure in last year's test, has been excluded from the exercise this year as it's currently involved in a restructuring scenario.The BoE said this year's stress scenario incorporates the following elements:"- A synchronised global downturn affecting Asia and the euro area in particular, and amplifying global disinflationary pressures; - Severe financial market stress with a reduction in global risk appetite, particularly in indebted economies, reductions in market liquidity, and some defaults of counterparties; and - A slowdown in the UK driven by the downturn in its trading partners, fall in confidence, and correction in market risk appetite. Additional monetary stimulus is pursued in the UK and elsewhere, lowering and flattening yield curves."The BoE said it will publish the results of the 2015 stress test alongside the Financial Stability Report in December 2015.The news release cited BoE governor Mark Carney saying that "by assessing the resilience of the UK banking system against a major external shock, we will improve further our ability to identify vulnerabilities and we will ensure that banks have plans in place to address a wider range of possible stresses.""As a forward looking regulator our job is never complete. Our focus is clear. To promote the good of the people of the United Kingdom, we are committed to ensuring that our major banks are resilient, that they can weather shocks without calling on taxpayer support, and that they can continue to lend even in adverse conditions. This year's stress tests will build on last year's work and advance our medium-term stress testing framework," Carney added.