BoE publishes stress test details
The UK's lenders will have to show they are able to withstand a 35 per cent slump in prices under details of stress tests published by the Bank of England today (April 29th).Eight major UK banks and building societies will be undertaking the tests this year, which gauge how well they would be able to withstand the price slump scenario, accompanied by a large rise in interest rates and a surge in unemployment of up to 12 per cent.Banks will be required to demonstrate that they would still have a core capital ratio of equivalent to at least 4.5 per cent of their weighted assets. UK banks will have to undergo the tests in addition to EU-wide stress tests announced in January 2014 by the European Banking Authority.These will test institutions' resilience under a common adverse scenario which provides for national variants.The BoE says it will add a number of extra layers to the EU stress tests to ascertain how lenders will be able to cope with vulnerabilities that affect the UK's banking system.According to the bank, its stress tests are not based on probable events but what it terms "a coherent, 'tail risk' scenario" that is designed specifically to assess the resilience of UK banks and building societies.Mark Carney, governor of the BoE, said: "Much has been achieved in recent years to put the UK banking system on a sounder footing, so that it can support the UK recovery. "The challenge now is to secure a strong, sustainable and balanced economic expansion. The Bank's annual stress test will help ensure our banks support that expansion by remaining resilient. Today's announcement represents a major step in that new framework."This news comes amid growing concerns that the UK housing market may be overheating, as prices continue to rise rapidly and supply fails to keep pace with demand.It is hoped the stress tests will ensure banks have sufficient capital to withstand another economic slump, rather than requiring taxpayer bailouts as in the 2008 financial crisis.
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