Bank of England to stress test lenders over seven years

The UK’s largest lenders must prove they can weather an economic storm for seven years in a new stress test from the Bank of England.

The ‘exploratory stress test’ will probe the UK’s seven largest lenders on how they would cope with weak global growth, low interest rates, falling world trade and cross-border banking activity as well as misconduct costs over that time.

The stress test will be published later this year and it’s found lenders aren’t sufficiently prepared for the scenario, seen as severe but plausible, the Bank will force them to make changes.

The exploratory stress test will be biannual and sit alongside the annual cyclical stress test.

While the announcement could be seen as a precursor to Prime Minister Theresa May triggering article 50 on Wednesday the concept of the exploratory stress test was originally published in October 2015.

The Bank’s Financial Policy Committee warned it will oversee lenders’ “contingency plans to mitigate risks to financial stability as this process unfolds”; adding there is a “range of possible outcomes” from Brexit.

The minutes from last week’s FPC meeting read: “The FPC supports the work of the PRA and FCA to ensure regulated firms have comprehensive plans in place to operate in a range of possible outcomes.

“Sudden adjustment could disrupt the provision of market liquidity and investment banking services, particularly to the EU real economy, which could spill back to the UK economy through trade and financial linkages.

“Over a longer horizon, the FPC is alert to the potential for greater complexity in firms’ business structures to reduce the resilience of the UK financial system and is examining appropriate mitigants.”

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