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 two types of banking stress test:
- 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).
- 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 scenario of the 2019 stress test of the UK banking system on 5 March 2019.
- Key elements of the 2019 stress test (PDF)
- Variable paths for the 2019 stress test (XLSX)
- Traded risk scenario for the 2019 stress test (XLSX)
- 2019 stress guidance for banks and building societies (PDF)
- Stress testing the UK banking system: 2018 results (PDF)
- Bank-specific results (PDF)
- Effectiveness of stress testing model risk management (PDF)
Data templates for the 2019 Concurrent Stress Testing exercise
We publish Concurrent Stress Testing exercise data requirements to participating firms for submission in Excel and in XBRL.
These Excel templates will be used for data submissions by firms subject to the 2019 Concurrent Stress Testing exercise. They have been provided directly to participating firms.
XBRL taxonomy for the 2019 Concurrent Stress Testing exercise
The link below contains the final version of the XBRL taxonomy, annotated templates and dictionary for the 2019 Concurrent Stress Testing exercise.
Data templates and dictionary for the 2020 Concurrent Stress Testing exercise
We publish Concurrent Stress Testing exercise data requirements to participating firms for submission in Excel and in XBRL.
These Excel templates and Dictionary are for data submissions by firms subject to the 2020 Concurrent Stress Testing exercise.
Public Working Draft (PWD) XBRL taxonomy for the 2020 Concurrent Stress Testing exercise
The link below contains the PWD version of the XBRL taxonomy, annotated templates and dictionary for the 2020 Concurrent Stress Testing exercise. Firms should submit feedback via their Stress Testing supervisory contacts by 6th Sept 2019.
Scenarios for banks and building societies not part of concurrent stress testing
The PRA has published two stress-test scenarios for banks and building societies to use which are not part of the existing annual stress testing exercise.
These scenarios will be published together annually. They are a guide and a benchmark of severity for firms designing their own scenarios. By publishing two different scenarios, we aim to encourage firms to consider the type, characteristics and severity of stress which their business model is vulnerable to.
We published our most recent scenarios on 28 March 2019. They are here:
The results of stress tests are an important consideration when we decide how to set capital requirements for banks and building societies.
Read our guidance on the role of stress testing in our Supervisory Statement on the internal capital adequacy assessment process (ICAAP) and the supervisory review and evaluation process (SREP).
How to use our stress test
You should consider the stress test scenarios in the context of your business and its own risks.
You should use our scenario as a starting point to build and accurately measure your own scenario 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
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 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 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.
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.
Stress testing updates
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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.
