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
There are two types of banking stress test:
The results of the 2017 stress test of the UK banking system were published on 28 November 2017.
Key elements of the 2018 stress test
Variable paths for the 2018 stress test
Traded risk scenario for the 2018 stress test
The Excel templates on this page will be used for the purpose of data submissions by the firms that are subject to the 2018 Concurrent Stress Testing exercise; they have also been provided directly to participating firms.
The PRA has published two stress test scenarios for use by banks and building societies that are not part of the annual concurrent stress testing exercise.
These scenarios will be published together annually. They are a guide and, where relevant, a benchmark of severity for firms designing their own scenarios. By publishing two differing scenarios, our aim is to encourage firms to consider the type, characteristics and severity of stress that their business model is vulnerable to, when designing their own stress testing scenario (or scenarios).
We published our most recent scenarios on 28 March 2018. They are here:
The results of stress tests are an important consideration for when we decide how to set capital requirements for banks and building societies.
You can find guidance on the role of stress testing within the framework for setting banks’ capital requirements in our Supervisory Statement on the internal capital adequacy assessment process (ICAAP) and the supervisory review and evaluation process (SREP). It’s here:
You should consider the stress test scenarios in the context of your business and its own specific risk drivers. Our scenarios should be used as a starting point to build and accurately measure your own scenario under Pillar 2. We know any single scenario that is designed for firms with very 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 ultimately 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.
Clarification on IFRS 9 for 2017 ICAAP stress testing and capital planning
Clarification on IFRS 9 for 2018 ICAAP stress testing and capital planning
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.
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.
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).
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.
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.
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.
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.
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)
On 27 March 2017, the PRA issued a letter on Stress test model management principles for firms participating in the 2017 concurrent stress test.
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.
2018 data templates