Bank Stress Tests Broadened By The BoE To Include Additional Buffers

    Photo by George Rex from Flickr

    Today, the Bank of England announced that it will broaden the scope of its bank stress tests to include the buffers that are designed to protect the financial system of the United Kingdom.

    In a statement, the Prudential Regulation Authority (PRA) of the Bank said that the tests are scheduled to take place near the end of the current year. It will include the systemic risk buffer.

    In the 2018 stress test, the Bank is anticipating for “uplifts” in the hurdle rates which banks must be able to achieve to pass the said test. Lloyds will be the toughest hit, with an additional 2.5 percent on its hurdle rate, while the Royal Bank of Scotland will also have 1.5 percent added. HSBC, Barclays, Santander UK, and Nationwide will all have one percent added.

    Various major British banks are required to hold additional capital, the systemic risk buffer, to make sure that losses in a major financial crisis will not sink the bank and pose a risk to the stability of the entire financial system of the United Kingdom.

    The PRA stated: “The calculation of minimum capital requirements incorporated in the hurdle rates will more accurately reflect how they would evolve in a real stress.”

    The latest stress test of Bank last November modelled how the balance sheets of banks would be able to cope with a global recession, a massive decline in house prices, and a four percent interest rate to counter the surging inflation. Among the banks that were tested, only RBS and Barclays fell short of the requirements of the Bank last year.

    The bank is also set to adjust how it accounts for the effect of the additional “Pillar 2A” buffers in the stress tests. However, the changes that are being made that are specifically intended for the treatment of Pillar 2A capital in the test imply that “on average, hurdle rates are expected to be lower than they would be under the previous calculation” for the said buffer.