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.
A video about Stress-testing.
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Hi my name is Noor and I work at the Bank of England. Here at the Bank of England, we need to keep an eye on how banks would cope with difficult economic situations. We do this by stress testing banks, against various hypothetical scenarios. The Bank of England then ensures that should these situations occur, banks hold sufficient capital to meet unexpected losses.
From 2016, we will use two ‘what if’ scenarios to test banks. The first will be a yearly test of shock scenarios of different levels of severity, based on the UK current economic cycle. The annual cyclical scenario could include falls in output or house prices or increases in interest rates or unemployment. The second will be an exploratory scenario every two years. This scenario will look at risks that are unlikely to happen but are still a concern, for example what might happen if a large bank fails. Banks have always been required to hold a minimum amount of capital to absorb losses, but from 2016 how the Bank of England looks at stress test performance is changing. With larger and more risky banks needing to carry more loss absorbing capital.
Should a bank not perform satisfactorily, the Bank of England has a range of powers, such as requiring the bank to take action to strengthen its capital position within a certain period of time.
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:
- 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).
- 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.
- 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
We published the scenario of the 2021 stress test of the UK banking system on 20 January 2021 and updated the spreadsheet containing variable paths on 26 March 2021.
- 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
- Financial Stability Report July 2021 - In Focus: Resilience of the UK banking sector
- Stress testing the UK banking system: 2019 results (pdf)
- Bank-specific results (pdf)
- Effectiveness of stress-testing frameworks (pdf)
Data templates and dictionary for the 2021 Solvency Stress Testing
We publish Solvency Stress Test data requests to participating firms, for submission in Excel. These Excel templates and dictionary are for data submissions by firms subject to the 2021 Solvency Stress Test.
A summary of the Bank of England 2021 Solvency Stress Test data request, an overview of the main changes since the previous version, and the operating model for the reporting of stress test data by participating firms can be found below:
The asset liability management template below is not submitted as part of the concurrent stress test, but feeds into our stress test analysis.
Data templates, manual and dictionary for the annual concurrent stress test 2022
The Bank publishes concurrent stress test data requests to participating firms, for submission in Excel. These Excel templates, manual and dictionary are for data submissions by firms for the 2022 Concurrent Stress test, and are all part of the Stress Test Data Framework (STDF).
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
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:
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.
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 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 others as the need arises. This assesses their ability to meet minimum stated capital levels throughout a stress period.
System-wide stress testing will be used by firms using a common scenario for financial stability purposes. To support its framework, the PRA sets policy for firms' stress testing requirements and stress scenarios, monitoring test results.
On Wednesday 17 June 2020 the PRA published a letter to participating general and life insurers on feedback for general and life insurers from the 2019 Insurance Stress Test.
On Wednesday 4 August 2021, the PRA published a letter to the largest life and general insurers, setting out the high-level scope for the 2022 Insurance Stress Test exercise.
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, to continuously assess their overall solvency needs for their insurance specific risk profile.
Reverse stress tests are stress tests that require a firm to assess scenarios and circumstances that would make its business model unworkable, 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 unrealistic at the point when forming risks cause the market to lose confidence in the firm.
Reverse stress testing is designed to be a risk management tool, encouraging firms to explore the vulnerabilities and faults in its business model, including tail risks. Tail-risk is the risk, or probability, of rare insured events occurring in the future.
The PRA works with others in the EU and internationally on approaches to stress testing.
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
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XBRL taxonomy for the 2020 Concurrent Stress Testing exercise
The link below contains the final version of the XBRL taxonomy, annotated templates and dictionary for the 2020 Concurrent Stress Testing exercise.
18 September 2020: Jointly with the Bank of England, Financial Conduct Authority, Competition & Markets Authority, Payment Systems Regulator, Information Commissioner’s Office, Pensions Regulator, and HM Treasury (as observer member), we published an updated version of the Regulatory Initiatives Forum’s grid Opens in a new window – a consolidated plan of initiatives that the authorities consider will, or may, have significant operational impact on firms across the next 24 months.
17 June 2020: We published a letter to participating general and life insurance firms on feedback for general and life insurers from the 2019 Insurance Stress Test.
7 May 2020: Jointly with the Bank of England, Financial Conduct Authority, Competition & Markets Authority, Payment Systems Regulator and HM Treasury (as observer member), we published the Regulatory Initiatives Forum’s first grid Opens in a new window – a consolidated plan of initiatives that the authorities consider will, or may, have significant operational impact on firms across the next 12 months.
7 May 2020: We published a statement announcing further details of our plans to support firms we regulate and enable them to focus resources on the highest priority work in light of Covid-19
20 March 2020: We announced the cancellation of our 2020 annual stress test and amendments to the biennial exploratory scenario timetable.
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June 2019
On 18 June 2019 the PRA published a letter and accompanying materials on the Insurance Stress Test 2019 which asks the largest regulated life and general insurers to provide information about the impact of a range of stress tests on their business. In addition, the stress test includes an exploratory exercise in relation to cyber underwriting and climate change. The set of climate scenarios explores the impacts to both firms' liabilities and investments stemming from physical and transition risks. The PRA will publish a summary of the overall results but no individual firm results will be made public. The deadline for submission is as follows:
- Sections A and B: 5pm, Monday 30 September 2019
- Section C: 5pm, Thursday 31 October 2019
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December 2018
On 14 December EIOPA published its results report of the insurance stress test exercise. More information on the stress tests and timescales can be found on EIOPA's website.
July 2018
Systemic Risk Buffers and Pillar 2A in stress test hurdle rates. In ‘Key elements of the 2018 stress test’ March 2018, the Bank of England noted its intention to change the way hurdle rates are calculated in the annual stress test in four ways. This statement provides further specific details on two of these changes.
May 2018
EIOPA launched its third Solvency II based stress test for insurers on 14 May 2018. EIOPA conducts biennial stress tests to help scale the impact on insurance companies of the crystallisation of various economic and non-economic risks. As in previous years, there is no pass/fail hurdle rate in the 2018 exercise but this year’s exercise will be focused on groups. More information on the stress tests and timescales can be found on EIOPA’s website.
April 2018
On Monday 30 April we published PS7/18 ‘Model risk management principles for stress testing’ and PS8/18 ‘Pillar 2: Update to reporting requirements’. Both publications are of interest to banks, building societies and PRA-designated investment firms.
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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:
General Insurance Stress Test 2017 - Scenario Specification, Guidelines and Instructions
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.
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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.
Stress testing news and publications
This page was last updated 04 August 2021
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