The Prudential Regulation Authority could broaden the scope of its bank capital stress testing to include medium-sized banks, the Bank of England revealed.
In a discussion paper published today, (1 October), the BoE revealed that along with the UK’s largest banks, medium-sized banks could be required to undergo a version of capital stress testing scaled down in proportion to their size.
The Bank’s stress-testing framework will likely include Barclays Group, The Co-operative Bank, HSBC Holdings Group, Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland Group, Santander UK and Standard Chartered Bank Group.
Along with the Bank of Ireland these make up the top nine biggest UK banks by assets. However, the BoE pointed out that for the purposes of capital stress-testing it uses the term ‘bank’ to describe banks, building societies and PRA-designated invsetment firms.
The Bank remarked that the costs of including small banks in the stress testing would likely outweigh the potential benefits, therefore would likely be excluded from the testing.
Insurers are also likely to be excluded as they already conduct their own stress testing. While UK subsidiaries of foreign global systemically important banks would be included, UK branches of foreign banks would likely escape the testing requirements.
Testing will take place annually and likely stretch from October to July, beginning with the Bank designing scenarios against which to test banks, and ending with the Financial Policy Committee and PRA reviewing results and publishing the outcomes.
Mark Carney, governor of the Bank of England, said: “The new stress tests will bring together expertise from across the Bank, including macroeconomists, financial stability experts and supervisors.
“This will materially strengthen the Bank’s analytical capability to assess risks to resilience. Our intention is that stress testing evolves into an essential component of our prudential framework, complementing our capital and liquidity standards.”
