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The Bank of England has diluted the crisis scenario it uses to examine the resilience of British banks, opting for a smaller inflation surge and a milder global economic contraction than in last year’s stress test.
The scenario for this year’s stress test, which the BoE published on Monday, requires Britain’s biggest lenders to model how they would cope with a rebound in UK inflation to a peak of 10 per cent and a 2 per cent decline in global GDP.
The conditions are milder than the “supply shock scenario” used by the central bank in 2024, when it examined the impact of a surge in UK inflation as high as 12 per cent and a 3 per cent drop in global GDP.
The BoE said the scenario was “intended to be a coherent ‘tail risk’ scenario designed to be severe and broad enough” for it to “assess the resilience of UK banks to a range of adverse shocks”.
The results would be “used to inform the setting of capital buffers” for banks, it added.
The seven largest UK banks and building societies would have to test how they handled a 20 per cent drop in world trade owing to “heightened geopolitical tensions”, the BoE said.
This follows a swath of tariffs imposed on US imports by President Donald Trump, and retaliatory measures by the EU and China, prompting fears of a trade war.
The BoE recently switched from annual stress tests to doing them every other year. Unlike last year, when the test was a desk-based exercise carried out by officials at the central bank, this year lenders will also carry out and submit their own projections.
The BoE has been stress-testing lenders since 2014 and none has failed since Royal Bank of Scotland was ordered to raise £2bn of extra capital in 2016. The results of the latest exercise will be published in the final three months of this year.
