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 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 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.

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 2018. 

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 firms’ 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.

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