Banks in the UK will be forced to prepare for a global economic downturn, as the Bank of England introduces tougher stress tests.
The central bank carries out these tests each year on the UK’s major banks. It usually assesses whether each bank would be able to cope with a recession in the UK, higher interest rates and a fall in house prices.
This year banks will be tested against a 4.7% fall in GDP, interest rates of 4% and a 33% fall in house prices.
The central bank has now added a further biennial test to make sure UK banks can cope with long-term, global challenges. Banks will be asked to show they can handle weak global trade, a low UK base rate and increased competition in the sector.
Banks will need to demonstrate they have the financial capability to cope with these scenarios.
In 2016 the Royal Bank of Scotland failed its stress test and was forced to increase its financial strength by £2 billion.
The results of the 2017 stress tests will be published in the final quarter of the year.
“2017 scenario incorporates fall in sterling”
The Bank of England says: “The sizes of the shocks to different sectors and economies are adjusted each year to deliver a similar stressed outcome unless the assessment of vulnerabilities warrants a change to that outcome.
“The stressed outcome for UK activity and unemployment is the same as in the 2016 annual cyclical scenario. For the global economy, the stressed outcome is worse than in 2016, largely reflecting continued rapid growth of credit in China.
“The United Kingdom’s large current account deficit creates a vulnerability to a reduction in foreign investor appetite for UK assets and increases in funding costs for real-economy borrowers. The 2017 cyclical scenario incorporates a sudden increase in the rate of return investors demand for holding sterling assets and an associated fall in sterling.”