Stress testing

What is stress testing?

We need to make sure banks and insurance companies are strong enough to withstand another financial crisis. So we set them ‘stress tests’ to find out if they are prepared for the worst.

Stress testing: banks and building societies

Banking stress tests assess how banks can cope with severe economic scenarios. We look at banks’ resilience, making sure they have enough capital to withstand extreme shocks and are able to support the economy.

Stress testing of banks: an introduction

Types of banking stress test

There are three types of banking stress test:

1. We run an annual concurrent stress test of the largest UK banks and building societies. This informs the setting of capital buffers by our Financial Policy Committee and our 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.
3. Every other year, we run an additional scenario intended to probe the resilience of the banking system to risks that may not be neatly linked to the financial cycle – the biennial exploratory scenario.

Annual concurrent stress test

Stress testing the UK banking system: the 2022 annual cyclical scenario

The Bank will return to its annual cyclical scenario (ACS) stress testing framework in 2022, following two years of Covid pandemic crisis-related stress testing. The 2022 ACS will test the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies, large falls in asset prices and higher global interest rates, and a separate stress of misconduct costs. In light of uncertainty related to the Russian invasion of Ukraine, and in order to help lenders focus on managing the ongoing financial markets disruption associated with the invasion, the FPC and the Prudential Regulation Committee (PRC) will delay the launch of the 2022 ACS. The FPC and the PRC intend to announce a revised timeline, which accounts for this delay, during Q2 2022.

We published the results of the 2021 solvency stress test of the UK banking system on 13 December 2021.

• Stress testing the UK banking system: 2021 results
• Financial Stability Report July 2021 - In Focus: Resilience of the UK banking sector
• Key elements of the 2021 stress test           
• Variable paths for the 2021 stress test  (macroeconomic variables, yield curves and traded risk) (xlsx)
• 2021 stress guidance for banks and building societies

This contains: 

• an overview of the Stress Test Data Framework; 
• detailed information on the purpose and content of all templates; and
• guidance on the data submission and data quality assurance process (which used to be published within the Operating Model for Reporting of Stress Test data). 

This includes all relevant reporting information for the STDF templates including Definitions, Enumerations, Validations (which used to be within 030 Validations), Patterns and Reconciliations. It also contains information on how the templates fit together (which used to be published in the Operating Model for Reporting of Stress Test data).

How to use our stress scenario

You should consider the relevance of our stress test scenarios in the context of your business and its own risks. 

You should use our scenario as a starting point to design adequately severe scenarios for your firm under Pillar 2. We know any single scenario which is designed for firms with different business models and risks, has its limits. We expect you to choose a scenario that provides a strong challenge for your business. 

You are responsible for developing your own scenarios to test your firm's resilience. Large banks and building societies should use the annual cyclical scenario.  

Firms who are subject to IFRS 9 should consider the following clarifications covering the expected approach to IFRS 9 within ICAAPs.

Historical guidance

• Clarification on IFRS 9 for 2017 ICAAP stress testing and capital planning
• Clarification on IFRS 9 for 2018 ICAAP stress testing and capital planning

Scenario for banks and building societies not part of concurrent stress testing

We published the Solvency Stress Test 2021 scenario for banks and building societies not part of concurrent stress testing on 15 February 2021. This scenario is available for firms to use as a template and severity benchmark to support their own ICAAP stress testing scenario design processes.

In line with Supervisory Statement 31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’, ICAAPs should be updated and stress testing undertaken at least annually.

The scenario is calibrated to robustly test and challenge business models and support firms in identifying key sensitivities and vulnerabilities within their balance sheets in the context of a severe downside outcome with an intensification of the macroeconomic shocks seen in 2020.

This scenario has been derived from the 2021 Solvency Stress Test scenario which was published on 20 January 2021 to support stress testing of the largest UK banks and building societies. The 2021 Solvency Stress Test exercise aims to explore how the banking system can continue to support the UK economy through the on-going stress and will be used as an input into the PRA’s transition back to its standard approach to capital-setting and shareholder distributions through 2021.

Banks and building societies not participating in the 2021 solvency stress test may consider the scenario published on 15 February 2021 alongside their internally developed stress scenarios applied as part of their ICAAP and internal risk management processes. Firms using this scenario to support ICAAP stress testing may observe outcomes which differ from those derived from previously published scenarios. In the event that the parameters of the scenario drive outcomes which differ to those derived from internally developed scenarios, the PRA would encourage firms to discuss these results with their supervisors so that the key drivers can be better understood.

As set out in our April 2020 ‘Q&A on the usability of capital buffers’, the PRA considers that it is appropriate for firms to draw down on their capital buffers to allow the continued support of the economy during the covid-19 related stress.

Given the current economic climate, stress testing remains an important supervisory tool to inform our understanding of the resilience of the sector.

Therefore our capital SREP assessments will have an additional emphasis on firms’ use of stress testing to understand their business model vulnerabilities and suite of mitigating actions. This will include an increased focus on reverse stress testing.

The details of the Solvency Stress Test scenario published on 15 February 2021 can be found here:

ICAAP scenario variable paths

Biennial exploratory scenario

Since 2017, we have also run a second type of concurrent stress test. Conducted every other year, this is known as the ‘biennial exploratory scenario’ (BES). Its focus changes from exercise to exercise, and is designed to explore risks facing banks not covered by the annual bank solvency focused test. Previous tests have covered risks from persistently low interest rates and liquidity risks.

Second round of the Biennial Exploratory Scenario: Financial risks from climate change

We launched a second round of the Biennial Exploratory Scenario (BES) exercise on financial risks from climate change on Wednesday 9 February 2022. 

The Climate BES exercise comprised of three main objectives (below). The second round will focus on the second objective, in particular participants’ proposed management actions in response to climate scenarios. 

• Size the financial exposures of participants and the financial system more broadly to climate-related risks.
• Understand the challenges to participants’ business models from these risks; and gauge their likely responses and the implications for the provision of financial services. 
• Assist participants in enhancing their management of climate-related financial risks. This includes engaging counterparties to understand their vulnerability to climate change. 

The second round will comprise a small number of questions, which will further explore participants’ strategic responses to the three scenarios published as part of the first round and the associated implications for their business models. Participants will not be required to update the quantitative loss projections they provided as part of the first round of the exercise. All Climate BES participants are taking part in the second round.

The deadline for participants’ second round submissions will be 31 March. The Bank expects to publish Climate BES results in May 2022. 

The 2021 Climate Biennial Exploratory Scenario

We published the 2021 Biennial Exploratory Scenario: Financial risks from climate change on Tuesday 8 June 2021. 

The 2021 Climate Biennial Exploratory Scenario (CBES) will explore the resilience of the UK financial system to the physical and transition risks associated with different climate pathways. The CBES uses three scenarios of early, late and no additional action to explore the two key risks from climate change; the risks arising from the significant structural changes to the economy needed to achieve net zero emissions – ‘transition risk’; and risks associated with the higher global temperatures likely to result from taking no further policy action – ‘physical risks’.  This is the first time we are testing both banks and insurers to allow us to capture interactions between them and understand the risk presented by climate change across the financial system.

• Key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change
• The 2021 Biennial Exploratory Scenario on the financial risk from climate change: Guidance for participants (PDF)
• Variable paths for the 2021 Biennial Exploratory Scenario: Financial risks from climate change (XLSX)

Data templates, data dictionary and qualitative questionnaire for use in the 2021 Biennial Exploratory Scenario

We publish the data templates, data dictionary and qualitative questionnaire for submissions by firms subject to the 2021 Biennial Exploratory Scenario. 

• Data templates for the 2021 Biennial Exploratory Scenario (ZIP) 
• Data dictionary for the 2021 Biennial Exploratory Scenario (XLSX)
• Qualitative questionnaire for the 2021 Biennial Exploratory Scenario (XLSX)

The 2019 Liquidity Biennial Exploratory Scenario

The Bank has published some of the key findings from the 2019 Liquidity BES (Financial Policy Summary and Record - March 2021).

Stress testing: insurers

Insurers should develop, implement and action an effective stress testing programme. Stress testing should assess 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, equal to the nature, scale and complexity of their business.

The PRA also expects insurance firms to apply reverse stress testing as part of their own risk and solvency assessment (ORSA) process, to continuously assess their overall solvency needs for their insurance specific risk profile.

• Supervisory Statement 19/16 ‘Solvency II: ORSA’

Insurance stress test (IST)

The PRA also runs its own stress tests on a periodic biennial basis for a number of insurance firms. 

These exercises assess the financial resilience of the life and general insurance sector in severe but plausible common scenarios, tailored to the vulnerabilities of the sector. The participants for the exercises are selected on the basis of expected significant exposure to one or more of the proposed scenarios

IST 2019

On Wednesday 17 June 2020 the PRA published a  feedback for general and life insurers from the 2019 Insurance Stress Test.

• Insurance Stress Test 2019: Feedback for general and life insurers 

IST 2022

Stress testing - Insurers

On Wednesday 4 May 2022, the PRA has launched its biennial insurance stress test and is asking the largest regulated life and general insurers to provide information about the impact of a range of stress scenarios on their business. 

The PRA will publish a summary of the overall results, but no individual firm results will be made public.

Insurers that have not been asked to participate in the stress test may find the materials useful to inform their own stress testing exercises.

The deadline for submission is 5pm, Wednesday 28 September 2022.

Questions about the Insurance Stress Test can be sent to IST.2022@bankofengland.co.uk.

On Thursday 20 January 2022, the PRA published a letter to the largest life and general insurers, requesting technical input for near final scenario specifications, instructions, data templates as well as qualitative Results and Basis of Preparation (RBP) report for the 2022 Insurance Stress Test exercise. 

On Wednesday 4 August 2021, the PRA set out the high-level scope for the 2022 Insurance Stress Test exercise in a letter to the largest life and general insurers. 

• Letter from the PRA 'Insurance Stress Test 2022 (IST 2022)'

Cyber stress test

Information on the cyber stress test being conducted in 2022 can be found in the Financial Policy Summary and Record - March 2021.

Stress testing updates