Stress testing

We use stress testing to assess the health of UK banks, building societies and insurers.

Stress testing: banks and building societies

Banking stress tests examine the potential impact of a hypothetical adverse scenario on the individual institutions that make up the banking system, and the system as a whole. This allows us to assess banks’ resilience and make sure they have enough capital to withstand shocks, and to support the economy if a stress does materialise.

We also require insurers to carry out stress tests.

 

Stress testing of banks: an introduction

Types of banking stress test

There are two types of banking stress test:

  1. We run an annual stress test of the largest UK banks and building societies. This informs policymaking by our Financial Policy Committee and the Prudential Regulation Authority (PRA). 
  2. Firms that are not part of this annual stress test must carry out their own stress testing. The PRA publishes a scenario every six months to serve as a guide for banks and building societies designing their own scenarios.

Annual banking stress test

We published the 2017 annual stress test scenarios and guidance for the seven largest banks and building societies on 27 March 2017. The results of the 2017 stress test of the UK banking system were published on 28 November 2017.

PDFKey elements of the 2017 stress test

ExcelVariable paths for the 2017 stress test

ExcelTraded risk scenario for the 2017 stress test

PDF2017 stress guidance for banks and building societies

PDFStress testing the UK banking system: 2017 results

Biannual banking stress test scenarios

Every six months the PRA publishes a scenario to be considered by banks and building societies that are not part of the concurrent stress test that we set for the seven biggest UK banks and building societies. This is intended to serve as a guide – and, where relevant, as a severity benchmark – for firms designing their own scenarios. 

We published the most recent scenario on Friday 21 April 2017:

Excel2017 H1 stress scenario

The results of these stress tests are an important input into how we set capital requirements for banks and building societies. Guidance on the role of stress testing within the framework for setting banks’ capital requirements is available in our Supervisory Statement on the internal capital adequacy assessment process (ICAAP) and the supervisory review and evaluation process (SREP).

Supervisory Statement 31/15

How the biannual stress scenario should be used

Firms should consider the stress test scenario in the context of their business and specific risk drivers. This scenario should be used as a starting point, from which firms should build and calibrate their own scenario/s under Pillar 2. This scenario reflects minimum adverse conditions, through which firms should assess their ability to maintain minimum specified capital levels.

We are aware of the limitations of a macroeconomic scenario that is to be used by various firms that are operating under different business models and exposed to a variety of risks. Therefore, the scenario is intended to help firms calibrate the severity of their own capital planning stress scenarios under Pillar 2, and it should not undermine firms’ efforts and responsibility to develop their own scenarios (which could include the annual cyclical scenario for ten biggest banks).

Clarification on IFRS 9 for 2017 ICAAP stress testing and capital planning

Clarification on IFRS 9 for 2018 ICAAP stress testing and capital planning

Stress testing: insurers

Insurance firms use stress and scenario testing to consider the potential impact of certain adverse circumstances on their business. It is an important element in firms’ planning and risk management processes, helping them to identify, analyse and manage risks.

Insurers should develop, implement and action a robust and effective stress testing programme that assesses their ability to meet capital and liquidity requirements in stressed conditions, as a key component of effective risk management. All firms should undertake relevant analysis, commensurate with the nature, scale and complexity of their business.

The Prudential Regulation Authority (PRA) also runs its own stress tests on a periodic basis for a number of insurance firms. It does this regularly for specific high-impact firms and for other firms as the need arises, to assess their ability to meet minimum specified capital levels throughout a stress period. 

System-wide stress testing  is also undertaken by firms using a common scenario for financial stability purposes. To support its framework, the PRA sets policy for firms' stress testing requirements, sets stress scenarios and monitors test results.

Reverse stress tests

The PRA also expects insurance firms to apply reverse stress testing as part of their own risk and solvency assessment (ORSA) process. Reverse stress tests are stress tests that require a firm to assess scenarios and circumstances that would render its business model unviable, thereby identifying potential business vulnerabilities. This differs from typical stress and scenario testing, which tests for outcomes arising from changes in circumstances. A firm's business model is described as being unviable at the point when crystallising risks cause the market to lose confidence in the firm.

Reverse stress testing is primarily designed to be a risk management tool, encouraging firms to explore more fully the vulnerabilities and fault lines in its business model, including 'tail risks', and to explore potential mitigating actions. The PRA works with counterparts in the EU and internationally on approaches to stress testing.

Supervisory Statement 19/16

Insurers: using the bank stress test scenario

The 2017 banking stress test scenario aims to give firms a consistent basis on which to confirm that their planned capital resources are sufficient to remain solvent and adequately capitalised in order to continue to write business throughout the capital-planning horizon (normally three to five years). 

Excel Banking system stress testing scenario: 2017 H1 

Firms may consider the conditions implied by the parameters set out in the scenario in order to derive consistent assumptions, on a prudent basis, for key risk factors that would affect their projected capital requirements. Firms should also consider insurance risk aspects (e.g. recession-related claims) arising from the scenario.

Insurers may incorporate these assumptions into their capital planning processes, and be prepared to show this in discussions with their supervisors. Insurers should also examine the complementary relationship between the one-in-200-year required stress and the macroeconomic scenario used for capital planning purposes. For example, a four-year capital plan might assess how a firm expects to be able to continue to meet its capital requirements over the next few years in the face of a changing economic environment.

  • 2017 updates

    December 2017

    On Thursday 7 December, Anna Sweeney, Director of Insurance, sent a letter to CEOs of participating firms on the 'General Insurance Stress Test 2017 Feedback’. This followed our request in April 2017 to the United Kingdom’s largest general insurers to participate in a stress test exercise (see April 2017 update below). We’d like to thank all insurers that were requested to participate in this exercise for their submission.

    On Wednesday 6 December, we published CP25/17 ‘Pillar 2: Update to reporting requirements’ and CP26/17 ‘Model risk management principles for stress testing’. Both consultations are of interest to banks, building societies and PRA-designated investment firms, and close on Tuesday 6 March 2018.

    April 2017

    On Friday 21 April The PRA published the 2017 stress test scenario for firms not participating in the 2017 concurrent stress test.

    General insurance stress test 2017

    On Tuesday 11 April the PRA sent a request to the United Kingdom's largest general insurers to provide information about the impact of a range of stress tests on their projected Own Funds, as well as providing additional information on their sectoral exposures to the UK economy.

    The General Insurance Stress Test 2017 (GIST 2017) exercise is split into two broad areas of interest:

    Section 1: a set of five severe but conceivable scenarios (four natural catastrophe scenarios and one economic downturn scenario consistent with the Banking Stress Test).

    Section 2: a capture of exposures that will allow the PRA to better understand the impact of potential losses by various sectors of the economy.

    Submission of the completed Excel template by the participating firms is requested by 17:00 on Friday 14 July 2017.

    The materials related to the GIST 2017 are listed below:

    PDF General Insurance Stress Test 2017 - Scenario Specification, Guidelines and Instructions

    Excel General Insurance Stress Test 2017 - Template 

    General Insurance Stress Test 2017 - letter to participating firms (for information)

    March 2017

    On 27 March 2017, the PRA issued a letter on Stress test model management principles for firms participating in the 2017 concurrent stress test.

    Letter

  • 2016 updates

    December 2016

    On Thursday 15 December EIOPA published its report of the EIOPA insurance stress test. The PRA will take forward the EIOPA recommendations with UK insurers as appropriate.

    More information on the stress tests and timescales can be found on EIOPA's website.

    EIOPA Insurance test 2016

This page was last updated 06 December 2017
Was this page useful?
Add your details...