The Bank of England has initiated the 2025 Bank Capital Stress Test for the top seven UK banks and building societies.
This new exercise, which replaces the previous Annual Cyclical Scenario (ACS), aims to assess the banking sector’ resilience under a hypothetical stress scenario involving asset price falls, deep recessions, and higher global interest rates.
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The seven banks and building societies participating in the test are Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK, and Standard Chartered.
According to the Bank of England, these financial institutions represent 75% of lending to the country’s economy.
The stress test is not a prediction but a ‘tail risk’ scenario, aimed at ensuring banks can withstand adversefinancial shocks.
The 2025 Bank Capital Stress Test consists of three elements – a macroeconomic scenario, a financial markets and traded risk scenario, and a misconduct stress.
The macroeconomic scenario outlines a severe global supply shock with significant economic downturns, including a 5% fall in UK GDP, a 2% drop in world GDP, and a near doubling of UK unemployment to 8.5%.
Other elements include a 20% decline in world trade, sharp increases in oil and gas prices, and a peak in inflation at 10%, and UK residential property prices fall by 28%.
Furthermore, the Bank Rate is assumed to reach a peak of 8% before declining.
This stress test is said to be the first conducted since the end of transitional arrangements for International Financial Reporting Standard 9 (IFRS 9) which was launched in 2018.
The Financial Policy Committee has determined that the new accounting standards should not lead to an unwarranted increase in capital requirements.
The Bank of England said it is implementing changes to align with this and will use this year’s test to assess the impact and inform future stress tests.
Results will be derived from assessments by both the Bank of England and the participating institutions and will be published in the fourth quarter of 2025.
These results will inform the setting of capital buffers for the banking sector and provide insights into financial system risks.
As per the the Bank’s updated stress-testing approach released in November 2024, similar capital stress tests are planned to be conducted biennially.
Earlier this year, it was reported that the Bank of England seeks to loosen regulations for banks and insurers to enhance economic growth.
