1: Executive summary
The Bank of England (Bank) is returning to the annual cyclical scenario (ACS) stress-test framework in 2022. This follows two years of Covid-19 pandemic crisis-related stress testing and its decision to postpone the test in March following Russia’s invasion of Ukraine. The Bank’s 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.
The Financial Policy Committee (FPC) and Prudential Regulation Committee (PRC) will use the test to assess bank balance sheets and the resilience of the UK banking system. By using stress tests to determine banks’ ability to withstand an adverse scenario, the Bank aims to ensure they are able to absorb rather than amplify shocks, and serve UK households and businesses.
The stress applied under the ACS is not a forecast of macroeconomic and financial conditions in the UK or abroad resulting from the current geopolitical situation and government responses to it.footnote  It is not a set of events that is expected, or likely, to materialise. Rather, as per previous ACS scenarios, it is a coherent ‘tail risk’ scenario designed to be severe and broad enough to assess the resilience of UK banks to a range of adverse shocks.
While previous stress tests have incorporated the impact of higher interest rates in the UK, this ACS will for the first time test UK banks’ resilience to higher global interest rates, in the face of a series of global cost shocks and high and persistent global inflation. The paths for interest rates are simply assumptions for the purposes of the stress test and are not an indication of how policymakers might respond in such an environment. In the scenario, UK Bank Rate is assumed to rise rapidly to 6% in early 2023 before later being reduced gradually to under 3.5%.
The stress scenario is more severe than the global financial crisis for both the UK and the world. In the stress scenario, weaker household real income growth, lower confidence and tighter financial conditions result in severe domestic and global recessions. In the UK, GDP contracts by 5.0%, unemployment more than doubles to 8.5% and residential property prices fall by 31%. World GDP falls by 2.5%.
The FPC and the PRC judge the scenario to be appropriately calibrated in light of the FPC’s assessment of the underlying level of risks and vulnerabilities in the UK and global economies and financial markets. They have also taken account of downside risks facing the economy as well as the heightened uncertainty in recent months.
For the first time, and as announced previously, the 2022 ACS will assess the ring-fenced subgroups of the existing participating banks on a standalone basis, where these differ materially from the group as a whole.
The 2022 ACS will cover a five-year horizon, with a start point of end-June 2022.
Banks will continue to be assessed on an International Financial Reporting Standard 9 (IFRS 9) transitional basis and the associated hurdle rate adjustments will continue to apply. Nevertheless, the FPC and PRC recognise that at the beginning of a real stress under IFRS 9 there is the potential for large capital drawdowns due to earlier provisioning. The Bank continues to consider its approach for an enduring treatment for IFRS 9 beyond the 2022 ACS, and intends in the coming months to engage with the ACS banks to investigate any options they may have to factor the level of credit loss provisions required by IFRS 9 into their future planning.
The results of the test will be published in summer 2023 and, along with other relevant information, will be used to help inform banks’ capital buffers (both the UK countercyclical capital buffer (CCyB) rate and Prudential Regulation Authority (PRA) buffers).
The Bank is returning to its usual ACS stress-test framework in 2022.
A key objective of the Bank’s approach to stress testing is to ensure that banks can withstand severe adverse shocks, while also adequately supporting the real economy through those shocks. Stress testing is an essential tool for protecting the stability of the UK financial system.
The Covid-19 pandemic has underlined the importance to society of banks being able to provide credit to households and businesses. Having used the solvency stress test (SST) in 2021 to test the resilience of the UK banking system against a much more severe evolution of the pandemic and consequent economic shock,footnote  the Bank is reverting to the ACS stress-testing framework for 2022.
Section 3 presents the macroeconomic and traded risk stress scenario in more detail, and explains how the scenario design process has been updated to make severity more consistent across variables. Section 4 provides a summary of the key features of the stress test. This includes a brief overview of the coverage of the test as well as the hurdle rate framework and potential policy responses. The Annex contains details of the baseline scenario.
Detailed guidance for stress-test participants along with the projections data underlying the 2022 stress scenario, can be found on the Bank of England website.footnote 
3: Scenario for the 2022 annual cyclical scenario stress test
The Bank’s 2022 ACS and guidance have been calibrated and produced by Bank staff, under the guidance of the FPC and PRC. The FPC and PRC judge the stress scenario to be appropriately calibrated given the FPC’s assessment of the current risk environment (Section 3.1).
In line with the Bank’s response to the Independent Evaluation Office’s 2019 report on stress testing, the design of the scenario has in part been informed by key emerging risks identified by supervisors of individual banks.
The stress applied under the ACS is not a forecast of macroeconomic and financial conditions in the UK or abroad. It is not a set of events that is expected, or likely, to materialise. Rather, as per previous ACS exercises, it is a coherent ‘tail risk’ scenario designed to be severe and broad enough to assess the resilience of UK banks to a range of adverse shocks.footnote  As such, the FPC and PRC judge that the ACS will be informative about banks’ overall resilience and their ability to absorb rather than amplify shocks, and serve UK households and businesses even in a stress. In common with previous exercises, the 2022 ACS contains three types of stress, which are assumed to be synchronised:
- A UK and global macroeconomic stress, spanning a five-year period from 2022 Q3 to 2027 Q2 (Section 3.2).
- A traded risk stress, linked to a financial market scenario consistent with the content and calibration of the macroeconomic stress (Section 3.4).
- A misconduct costs stress (Section 3.5).
The ACS is calibrated on the assumption that banks satisfy the demand for credit from UK households and businesses throughout the stress scenario (Section 3.3).
3.1: The FPC’s assessment of underlying vulnerabilities
The ACS is countercyclical and linked to the FPC’s assessment of underlying vulnerabilities in the UK and global economies.
The ACS is intended to represent a coherent set of tail events, the broad severity of which is benchmarked against historical experience.footnote  The scenario is explicitly countercyclical to test banks’ resilience to severe but plausible shocks. As vulnerabilities increase, the likelihood of an economy facing a more severe downturn also increases, and the sizes of the shocks are increased to reflect that. Such an approach should mean that the impact of the scenario on banks’ capital ratios increases when vulnerabilities are judged to have risen and decreases as vulnerabilities crystallise or abate. This approach allows banks to build up buffers of capital outside stress, so that they can be drawn down during periods in which the economy is in stress.
The FPC assesses the level of underlying vulnerabilities in each of the major sectors and economies to which UK banks are exposed. The total level of debt in an economy, and how fast it is growing relative to GDP, are also key inputs into the FPC’s assessment of underlying vulnerabilities in an economy. Empirical evidence shows that high debt burdens and credit booms tend to be associated with more severe recessions, so as these burdens grow, the risk of a more severe recession in an economy tends to grow with them.footnote  Debt vulnerabilities in other countries could also have indirect spillovers to the UK. For example, they could increase the risk of a sharp tightening in global financial conditions and macroeconomic downturns in other countries, which could transmit to the UK.footnote 
In July 2022 the FPC judged that while UK debt vulnerabilities had risen recently, overall they remained at a standard level.footnote  As noted above, the ACS also includes stress scenario profiles for the key regions of the world to which UK banks are exposed and where spillover effects back to the UK are possible. These include the United States (where riskier corporate borrowing remains a key focus), the euro area (where FPC have previously highlighted vulnerabilities from high public debt levels), and China and Hong Kong (where several vulnerabilities have begun to crystallise). In July 2022, these global debt vulnerabilities, that could amplify risks to UK financial stability, were judged to be material.
The calibration of the stress scenario has also taken account of downside risks facing the economy. There has been a series of significant developments since the Bank last ran an ACS in 2019. The Covid-19 pandemic and the Russian invasion of Ukraine have both had implications for the financial system. Moreover, the economic outlook for the UK and globally has deteriorated materially in recent months, with global inflationary pressures intensifying sharply. Global financial conditions have also tightened significantly, in part as central banks across the world have tightened monetary policy.
The economic outlook is also subject to considerable uncertainty and there are a number of downside risks that could adversely affect UK financial stability. Developments related to the Russian invasion of Ukraine are a key factor that will affect both the global and UK outlooks. Tighter financial conditions would increase the pressures already facing households and businesses and the serviceability of public sector debt in some countries, including the euro area. And risks remain in China around the re-emergence of vulnerabilities in the property sector and potential restrictions to contain further Covid outbreaks.
It is in this context that the FPC and PRC have considered the appropriate calibration of the 2022 ACS. The key judgements underpinning the severity of the stress scenario are consistent with the FPC’s most recent judgements, as set out in the July 2022 Financial Stability Report, as noted above, while also accounting for recent data news.footnote  So, for example, the overall severity of the UK stress is broadly similar to that of the 2019 ACS, reflecting the FPC’s judgement that while UK debt vulnerabilities have risen recently, overall they remain at a standard level. Conversely, at -0.1% and -6.9% the falls in China and Hong Kong real GDP are smaller than those in the 2019 ACS (-1.2% and -7.9% respectively). This is because even though underlying vulnerabilities for both areas are still judged to be particularly high, the fact that some risks associated with financial conditions have started to crystallise means the magnitude of remaining risks has diminished. And for China specifically, the trend growth rate remains strong relative to other jurisdictions. As a result, and consistent with the Bank’s countercyclical approach to stress testing, the start-to-trough falls in GDP are smaller than previous tests.
3.2: The macroeconomic stress-test scenario
The scenario calibration takes into account the FPC’s risk assessment, as well as a consistent severity across different variables.
For the 2022 ACS, the FPC and PRC have decided to update aspects of the scenario design relative to previous ACS scenarios. In particular, the scenario takes into account the latest risk assessment, as described in Section 3.1, and its severity has been calibrated to ensure greater consistency across different variables. The aim is to stress key scenario variables to a similarly severe point in the historical distribution for each variable, conditional on the risks prevailing at the time in a coherent way.footnote  For instance, the change in UK unemployment to its peak, which occurs after six quarters of the scenario, is far into the tail – the first percentile – of the distribution of historical experience (Chart 1). It is also somewhat more severe than the global financial crisis.footnote  As well as the changes to peaks and troughs, recovery paths have been updated to more closely reflect the historical distributions. Overall, therefore, the five years of the scenario as a whole are more consistent with historical evidence, relative to previous exercises.
Chart 1: Macroeconomic variables such as unemployment have been calibrated to be around the first percentile of the historical distribution
Change in UK unemployment in the stress compared with historical experience in advanced economies (a)
- Sources: OECD and Bank calculations.
- (a) The diagram is a graphical representation of the historical distribution of the change in unemployment over six quarters since 1970 from a panel of 38 advanced economies. Data are quarterly. The highest point represents the mode: this is the most frequent occurrence over this historical time period. The blue line slopes downward in either direction, reflecting fewer observations further away from the mode. The orange line shows the change in UK unemployment over the first six quarters of the 2022 stress scenario, to its peak. The purple line shows the change in UK unemployment over the worst six consecutive quarters of the 2008 global financial crisis (GFC).
Relative to the 2019 ACS, the FPC judges that changes in calibration are broadly neutral for the overall severity of the ACS (Table A).footnote  Within this assessment, the changes lead to a modest increase in the stresses to UK GDP and commercial real estate (CRE) prices, modest reductions to the stresses to UK unemployment and residential property prices, and limited change to the global GDP stress. Overall, the stress is more severe than the global financial crisis for both the UK and the world, with larger movements in UK unemployment and property prices.
Table A: The stress scenario is broadly similar to the 2019 ACS and more severe overall than the global financial crisis
Global financial crisis
UK real GDP
World real GDP
UK unemployment (change)
UK unemployment (peak level)
UK residential property prices
UK CRE prices
UK Bank Rate
UK equity prices
- Sources: Bank of England, Bloomberg Finance L.P., Eikon from Refinitiv, Eurostat, Halifax/Markit, IMF World Economic Outlook, MSCI Investment Property Databank, National Bureau of Statistics of China, Nationwide, ONS, US Bureau of Economic Analysis and Bank calculations.
- (a) Data are quarterly or quarterly averages.
- (b) Figures for 2022 and 2019 ACS show start-to-trough changes. Figures for the global financial crisis are peak-to-trough.
- (c) Global financial crisis data for UK residential property prices are a combination of the quarterly Halifax/Markit and Nationwide house price indices.
- (d) Bank Rate figures show the start to peak change for 2022 ACS and 2019 ACS, and the start to trough change for the global financial crisis.
The rest of this section describes the important aspects of the 2022 macroeconomic stress scenario in more detail. It includes a description of some aspects of the scenario not included in the set of published stress macroeconomic variable paths. This should help guide participating banks in generating their own stressed projections for these aspects. As in previous tests, the ACS spans a five-year period, but this time it begins mid-year, in 2022 Q3.
The 2019 ACS explored the risks from higher interest rates in the UK, and stress tests in 2020 and 2021 explored the risks from low interest rates across the UK and global economies. This year’s ACS tests for the first time the UK banking system’s resilience to higher policy rates across almost all countries.
The stress applied under the ACS is not a forecast of macroeconomic and financial conditions in the UK or abroad. It is not a set of events that is expected, or likely, to materialise. Rather, as per previous ACS scenarios, it is a coherent ‘tail risk’ scenario designed to be severe and broad enough to assess the resilience of UK banks to a range of adverse shocks.
High-level scenario narrative: The scenario embodies a significant rise in inflation across advanced economies accompanied by a sharp tightening in global financial conditions. Ongoing energy supply issues combine with cost shocks in other markets help keep inflation persistently elevated. High inflation is assumed to lead to expectations of higher inflation in the future, and monetary policy makers raise interest rates rapidly. Policy rates are reduced later on, although the scope to do so is limited by persistently high inflation.
The effects of rising costs fall unevenly across households and businesses. Sectors with a greater reliance on imports, as well as those more exposed to energy and food prices, are particularly affected. Over time, businesses pass these higher costs through to prices, putting further pressure on households’ real incomes. And lower-income households, for whom essential spending represents a greater share of their income, are disproportionately affected.
A fall in real household income, lower confidence and tighter financial conditions result in a severe UK recession. Similar shocks also contribute to marked downturns in all of the UK’s major trading partners. Higher advanced-economy interest rates contribute to capital outflows and particular stress in some emerging markets.
The scenario embodies a series of cost shocks, and high and persistent consumer price inflation, across advanced economies.
Consumer price inflation across advanced economies increases sharply in the stress scenario. Annual UK inflation averages around 11% over the first three years of the scenario (compared with a little over 6% in the baseline scenario that is derived from the MPC’s most recent central projection, as set out in the August Monetary Policy Report). It peaks at 17% in early 2023 and does not begin to fall until the second half of the year (Chart 2). The rise in inflation predominantly reflects increases in energy and food prices as well as wider global supply chain pressures affecting import and domestic prices.
Chart 2: UK CPI inflation is higher and more persistent in the ACS than in the baseline
Annual UK CPI inflation in the 2022 ACS
- Sources: ONS and Bank calculations.
Inflation stays persistently high for the majority of the scenario, falling back only gradually to 3.4% by end-2024 and 2% by 2027. Over the first three years of the scenario consumer prices rise by nearly a third, leaving the price level around 15% higher than in the baseline scenario (Chart 3).footnote  While the initial sharp rise in inflation primarily reflects a series of costs shocks that push up import prices, its persistence partly reflects an assumption that the rise in headline inflation causes expectations of higher inflation for some time, as well as wage growth. This creates a challenging trade-off between growth and inflation. In addition, ongoing supply chain disruption as well as a rise in structural unemployment across the globe limits the downward pressure on inflation from the level of slack – the balance between demand and supply in the economy – that opens up. In turn this limits the downward pressure on inflation resulting from the weakness in output.
The path for inflation in the stress scenario – like the other variables set out below – constitutes a severe but plausible ‘tail risk’ scenario. It is not a central forecast, and throughout the scenario the annual rate of UK CPI inflation is consistently above the baseline projection which is in line with the August 2022 Monetary Policy Report.
As import costs rise over the scenario, UK companies initially face a squeeze in margins as they are not able to raise prices to the same degree. Companies that rely heavily on imports, those with large exposures to energy or food prices, as well as those reliant on discretionary spending, are particularly affected. But over time, they pass these higher costs through to prices, putting further pressure on households’ real incomes, which fall by around 13% in the stress. The effect of this falls unevenly, with lower-income households, for whom essential spending represents a greater share of their income, disproportionately affected.
Chart 3: By the third year of the stress prices are around 15% higher than in the baseline scenario
UK consumer price index in the 2022 ACS
- Sources: ONS and Bank calculations.
Persistently high inflation creates a challenging trade-off for monetary policy makers in advanced economies. They are assumed to raise interest rates rapidly.
In this tail risk scenario, central banks around the world respond to a challenging trade-off between weaker growth and higher inflation. In order to prevent higher inflation expectations becoming entrenched, monetary policy makers raise policy interest rates sharply and to a similar degree.
In the UK, Bank Rate is assumed to rise from an average of a little under 1% in Q2 2022 to 6% by the first quarter of 2023 (Chart 4). This is simply a hypothetical assumption for the purpose of the stress test. It is not a forecast of how monetary policy would actually respond in such a scenario. Relative to baseline projections, policy rates rise by a broadly similar magnitude in the euro area and US.
As inflation begins to fall back in later years, policymakers are able to reduce Bank Rate to support the recovery and, in the UK, inflation returns to target by the end of the stress scenario.
Chart 4: Policy rates rise in the stress, with Bank Rate peaking at 6%
Policy rates in the 2022 ACS (a)
- Sources: Bank of England and Eikon from Refinitiv.
- (a) This chart was updated on 19 October 2022 with changes made to the historical data for the United States series. No changes have been made to the baseline or stress projections.
Longer-term market interest rates across the world increase due to a higher expected path for policy rates and an increase in term premia – the additional compensation that investors require for holding long-term bonds. That increase reflects investors’ perceptions of higher macroeconomic uncertainty and increased risk around inflation and interest rates. In the UK, the 10-year gilt yield increases sharply by 3.3 percentage points, peaking at over 5.3%.
Banks’ wholesale funding spreads also rise materially, and this spills over into retail funding costs. For example, five-year senior unsecured bond yields rise by 275 basis points relative to risk-free rates over the first year of the stress, before falling back.
A fall in real household real income, lower confidence and tighter financial conditions result in a severe UK recession.
UK demand weakens sharply, reflecting the lower real income associated with the supply shock, alongside lower confidence, tighter financial conditions and weaker global activity. There is a pronounced contraction in UK output and a sharp increase in unemployment.
UK GDP falls by 5% over the first year of the scenario (Chart 5). Although positive growth returns after this, by the end of the scenario output is still 0.3% below its pre-stress level and 0.7% below the baseline path (Chart 6). The level of output on average over the five-year scenario is 2.6% weaker than its 2022 Q2 level. The recovery in growth is somewhat faster than in previous stress scenarios, in line with the updated assessment of historical data.
Chart 5: UK GDP falls by 5% in the stress
Annual growth in UK real GDP in the 2022 ACS (a)
Chart 6: By the end of the stress scenario UK GDP is still below its pre-stress level
UK GDP in the 2022 ACS
- Sources: ONS and Bank calculations.
As the economy weakens, nominal household income growth slows relative to the baseline scenario. Reflecting high inflation, real household income is particularly weak. It falls by around 13% to its trough in 2023, substantially more than GDP, and only recovers very marginally in later years.
Unemployment rises by 4.7 percentage points to peak at 8.5% at the end of 2023. The rise in unemployment is associated with an increase in structural – underlying – unemployment. This contributes to unemployment falling back only slowly thereafter, to 6.5% by the end of the scenario, with the level 3.5 percentage points higher on average over the scenario than 2022 Q2. The rise in structural unemployment also helps keep inflation higher than would otherwise be the case. Together with higher interest rates and lower real incomes, this creates challenges for households’ ability to service their debt. The effects of this are felt unevenly across households, with lower-income households, for whom essential spending represents a greater share of their income, disproportionately affected.
Nominal corporate profits fall by 3.5% by the first quarter of 2023. But the effects of the overall economic downturn vary considerably across sectors, with greater falls in output in those sectors that are more exposed to energy and import prices or supply chain disruption in the scenario. Those sectors that remain fragile following material structural changes in consumer spending patterns associated with the Covid pandemic (eg accommodation and food) are also particularly affected.footnote 
Property prices also fall. UK residential property prices fall by 31% over the first half of the stress (Chart 7). This is in the tail of the historical distribution, and broadly comparable with a number of past severe housing market downturns in other advanced economies. The falls are more pronounced in those regions and nations of the United Kingdom which have seen more rapid house price growth since the pandemic. There is a modest recovery in house prices later on in the scenario, such that at the end of the five years they stand 20% lower than their pre-stress level.
Chart 7: The fall in UK house prices is in the tail of the historical distribution
Change in UK residential property prices in the stress compared with historical experience in advanced economies (a)
- Sources: OECD and Bank calculations.
- (a) The diagram is a graphical representation of the historical distribution of the change in nominal residential property prices over 11 quarters since 1970 from a panel of 47 advanced economies. Data are quarterly. The highest point represents the mode: this is the most frequent occurrence over this historical time period. The blue line slopes downwards in either direction, reflecting fewer observations further away from the mode. The orange line shows the change in UK residential property prices over the first 11 quarters of the 2022 stress scenario, to its trough. The purple line shows the change in UK residential property prices over the worst 11 consecutive quarters of the 2008 GFC.
UK commercial property prices fall sharply in the scenario, by 45% from start to trough. They fall by more than house prices, consistent with evidence from historical stresses on average. That reflects that occupier demand for CRE is more cyclical as more businesses enter insolvency, as well as the greater role of financial market investors in the CRE market and their sensitivity to swings in risk appetite and broader financial conditions. The fall in CRE prices is greater in those market segments where prices have increased recently (eg prime industrial) or that are facing structural pressures (eg secondary offices and retail). CRE prices recover somewhat from their trough, ending the scenario 31% lower than their 2022 Q2 level.
Similar shocks contribute to marked downturns in all of the UK’s major trading partners.
Global output contracts by 2.5% over the first year of the scenario as economies around the world experience severe and synchronised slowdowns (Chart 8).footnote  Given the common shocks to supply chains, inflation and interest rates, the global stress scenario unfolds in a broadly similar way to the UK scenario (Charts 9 and 10). Additionally, some of the country-specific vulnerabilities described in Section 3.1 crystallise. And as in the UK, the effects of the downturns internationally are greater in those sectors or countries more exposed to supply chain disruption, as well as those still fragile from where the pandemic accelerated structural changes in consumer spending patterns.
Chart 8: World GDP falls by 2.5% in the stress
Annual growth in world real GDP in the 2022 ACS (a)
- Sources: Bank of England, Eikon from Refinitiv, Eurostat, IMF World Economic Outlook (WEO), National Bureau of Statistics of China, US Bureau of Economic Analysis and Bank calculations.
- (a) Chained-volume measure. Constructed using real GDP growth rates of 189 countries weighted according to their shares in world GDP using the IMF’s purchasing power parity (PPP) weights. Annual growth is defined as quarterly GDP relative to the same quarter in the previous year.
Chart 9: The UK and overseas economies experience sharp falls in output and increases in unemployment
Changes in GDP and unemployment in the 2022 ACS
- Sources: Bank of England and Bank calculations.
Chart 10: The UK and overseas economies experience severe falls in property prices
Changes in residential property and CRE prices in the 2022 ACS (a)
The rest of this section describes how the scenario unfolds for the countries outside of the UK in which the ACS banks have most exposures – the euro area, US, China and Hong Kong.
Euro-area GDP contracts by 4.9% over the first year of the scenario (Chart 9), with output falling to a broadly similar extent across countries. Growth resumes thereafter but the level of euro-area output at the end of the stress scenario is still 1.1% lower than 2022 Q2. Euro-area unemployment rises by 5.3 percentage points to peak at 11.9% in 2024, before falling to 8.5% by the end of the scenario.
Reflecting the global cost shocks and concerns around inflation expectations, inflation in the euro area rises sharply to 14.4% and the European Central Bank is assumed to raise policy rates rapidly from their 2022 Q2 level of -0.5% to 4.7% by the beginning of 2023, before gradually reducing them to under 4% by 2025 and under 3% by the second half of 2026 (Chart 4). Long-term market interest rates rise and subsequently fall back.
Residential and commercial property prices in the euro area fall by 22% and 41% respectively in the stress (Chart 10). Although they begin to recover, they end the five-year scenario 12% and 22% lower than their pre-stress levels.
GDP in the United States contracts by 4.1% over the year to 2023 Q2 (Chart 9). Thereafter, modest output growth resumes, albeit faster than previous ACS scenarios, such that output ends the scenario broadly in line with its 2022 Q2 level. US unemployment rises from 3.6% to 8.6% by the end of 2023, before falling back gradually to 5.5%.
Similarly to other advanced economies, inflation in the US rises sharply, with the Federal Reserve assumed to raise policy rates to 6.5% by the beginning of 2023, before cutting them to under 4% by 2027 (Chart 4). Ten-year US government bond yields rise to over 6 % before falling back to 4.2% by the end of the stress horizon.
US residential property and CRE prices fall by 28% and 45% respectively in the early part of the scenario (Chart 10). They start to recover over the final years, ending 14% and 21% lower respectively than in 2022 Q2.
Overall corporate profitability in the US falls in the scenario and the cost of corporate credit rises. Consistent with heightened risk-taking in leveraged lending markets, large highly leveraged companies are among the most severely affected, due to difficulties refinancing these loans as they mature. Large companies are important for investment and employment, and so anticipated and crystallised difficulties in refinancing are assumed to amplify the downturn and dampen the recovery in the US. Furthermore, this stress to corporate financing is assumed to affect highly leveraged borrowers in other advanced economies such as the UK and the euro area, spilling over more broadly to weaker economic conditions there.
GDP in China falls by 0.1%, a significant slowdown compared to average annual growth of 6%-7% over 2016-19. That in part reflects the FPC’s judgement that risks in China are particularly high and have begun to crystallise. Growth recovers to 4.5% by the end of the scenario, still slightly weaker than 4.8% in the baseline projection.
The contraction in output in China is accompanied by residential property prices falling by 36%, with these subsequently recovering to 22% lower than their pre-stress level (Chart 10). Household income grows by 1.5% in the year to 2023 Q2, a material weakening relative to its average 2016–19 growth rate of 8%, although it recovers to 6.8% later in the scenario.
Output in Hong Kong contracts by 6.9% in the first year of the stress scenario (Chart 9). This is a larger fall than other major economies, reflecting its greater historical volatility and the FPC’s judgement that risks in Hong Kong are particularly high. Growth recovers thereafter, with the level at the end of the scenario around 2% higher than in 2022 Q2, albeit substantially weaker than the baseline projection. Unemployment in Hong Kong increases by 2.6 percentage points to peak at 7.7% in 2023 Q4, before falling back to 5.3% by mid-2027.
Residential property and CRE prices in Hong Kong fall by 43% and 53% respectively from start to trough (Chart 10), consistent with previous episodes of stress. While they recover, they end the scenario 32% and 35% down on their pre-stress level.
In Hong Kong, the Hibor interest rate rises, peaking at a little over 8% in 2023, before falling back to 3.8% by the end of the scenario.
Economic activity in Singapore and India weakens as part of a broad-based downturn in growth across Asia. GDP in Singapore falls by 7.7% and in India annual output growth slows sharply to 0.9% in 2023 Q2. That compares with average annual growth rates of around 3% and 7% respectively between 2016 and 2019.
Higher interest rates contribute to capital outflows and particular stress in some emerging markets.
For emerging market economies (EMEs) more broadly, the increases in advanced-economy interest rates leads to some capital outflows from EMEs together with weaker exchange rates. These factors are associated with upward pressure on domestic interest rates in EMEs, resulting in additional constraints on economic activity. Slowdowns in output are more severe, and subsequent recoveries delayed, in countries that have high levels of external debt or are more reliant on: external finance for current account deficits; trade – given a sharp fall in world trade volumes of 17%; or energy and other commodity imports.
Commodity prices increase sharply in the scenario, reflecting further shocks to supply. Oil prices increase from an average of just over US$110 per barrel in 2022 Q2 to US$160 per barrel in 2022 Q3, before falling back to less than US$100 per barrel, as supply issues partially unwind and demand softens in the face of higher interest rates. Similarly, gas prices rise from an average of around 150 pence per therm in 2022 Q2 to over 400 pence per therm in 2022 Q4 before remaining at around 330 pence per therm for the remainder of the scenario. Prices of other energy and non-energy commodities also rise significantly.
3.3: UK lending in the stress
The ACS is calibrated on the assumption that banks satisfy the demand for credit from UK households and businesses throughout the scenario.
An important macroprudential goal of the stress test is to help the FPC assess whether the banking system is sufficiently well capitalised to support the real economy in the face of severe adverse shocks. The importance of this goal was particularly apparent during the Covid pandemic. UK households and businesses needed support from the financial system to weather the economic disruption associated with the pandemic.
The 2022 ACS is calibrated on the assumption that banks satisfy the demand for credit from the UK real economy throughout the stress scenario. Banks are assumed not to reduce the supply of credit, and credit should be priced consistently with the overall scenario. The Bank has published paths for aggregate lending to UK households and private non-financial corporations (PNFCs) based on these assumptions. Stress-test participants will be expected to submit projections for lending under the stress which are consistent with those aggregate paths. This is described in more detail in the guidance for stress-test participants.
In total, over the five years of the stress scenario total lending to the UK real economy increases by more than 10% . Four-quarter growth in lending slows sharply to a trough of -1% in 2024 (Chart 11), reflecting lower credit demand in the face of weaker economic activity. Later in the scenario it recovers as output increases and bank wholesale funding costs fall back.footnote 
Consistent with the path for lending growth and weak real income, retail deposits fall. In total, over the five-year scenario the stock of deposits falls by around 3%.
Chart 11: Lending growth slows sharply in the scenario before recovering
- Sources: Bank of England and Bank calculations.
- (a) Data excludes the estimated impact of government loan schemes on the growth rate of monetary financial institutions' sterling net lending to private non-financial corporations over the course of 2020 and 2021. For further details and guidance see the published variable path spreadsheet.
- (b) The baseline scenario is designed to be broadly consistent with the forecasts published in the August 2022 Monetary Policy Report.
- (c) This chart was updated on 19 October 2022 with changes made to the historical data series. No changes have been made to the baseline or stress projections.
3.4: The scenario for financial markets and traded risk
The increase in risk aversion spills over into financial markets, leading to falls in asset prices.
Equity prices fall and corporate bond spreads rise in the stress, reflecting an increase in risk aversion, increased perceptions of risk and weaker corporate profitability. Equity prices in the UK and US, as measured by the FTSE All-Share and Standard & Poor’s 500 indices, fall by 42% and 49% respectively over 2022–23 (Chart 12). UK equity prices recover to around their 2022 Q2 level by the end of the scenario, with US equity prices somewhat higher than their pre-stress level, although both are some way below the baseline projection.
Chart 12: UK equity prices fall by 45% in the stress, with corporate bond spreads rising sharply
- Sources: Bloomberg Finance L.P, ICE/BofAML Global Research and Bank calculations.
- (a) UK equity prices are the quarterly average of FTSE All-Share price index.
- (b) Corporate bond spreads are the quarterly average option adjusted spread over maturity-matched government spot curve on GBP denominated investment-grade corporate debt publicly issued in the eurobond or UK domestic market.
Global financial conditions tighten significantly as central banks tighten monetary policy. The spread between the yield on investment-grade corporate bonds and risk-free interest rates increases sharply from 171 basis points in 2022 Q2 to 419 basis points in the UK, and from 141 basis points to 574 basis points in the US. For high-yield corporate bonds, spreads increase from 541 basis points to 1953 basis points in the UK, and from 434 basis points to 1695 basis points in the US. The increase in corporate bond spreads reflects a number of amplification channels, consistent with evidence observed in recent years of increased vulnerabilities in market-based finance.footnote  This includes the impact of both open-ended and leveraged funds selling off their holdings of corporate bonds at a discount – known as fire sales – in response to investor withdrawals as uncertainty increases. Later in the scenario, spreads fall back.
Measures of market-implied volatility also rise, with the CBOE Volatility Index (VIX) increasing by around 65% from its 2022 Q2 level to peak at a quarterly average of 45 in 2023 Q2.
The sterling-dollar and sterling-euro exchange rates are assumed to be flat in the scenario. EME currencies depreciate against the dollar, as described above.
The calibration of the traded risk scenario reflects developments in financial markets as well as the macroeconomic scenario.
The 2022 ACS includes a traded risk scenario that has been designed to be consistent with the macroeconomic scenario and to take account of the liquidity of trading book positions. This will principally affect the investment banking operations of UK banks.
The traded risk component of the ACS requires banks to apply a price shock to their market risk positions as of 8 July 2022. The Bank’s approach to traded risk takes account of different liquidity horizons by imposing larger shocks on positions that banks would take longer to close out, and smaller shocks for those positions that could be sold or hedged within shorter time frames.
The 2022 traded risk scenario will capture the main risks to stress-test participants from leveraged lending (see ‘Traded risk scenario for the 2022 stress test’ for further details). The leveraged loan index price shocks included in the scenario are broadly similar to those seen during the global financial crisis and account for the deterioration in lending standards over recent years (Section 3.1).
The test will also examine the ability of banks to withstand the default of seven counterparties that would be vulnerable to the macroeconomic scenario. In determining the counterparties to default, banks are instructed to consider both the current creditworthiness of their counterparties, and how that creditworthiness might deteriorate under the stress scenario.
In addition to examining the impact of the default of specific counterparties, the scenario will test the broader portfolio impact from default losses amongst a cohort of counterparties that are below a certain rating, and that are vulnerable under the stress scenario. The test also includes stressed revenue and costs projections for investment banking activities.
The 2022 ACS incorporates an orderly transition from Libor to alternative reference rates in line with planned timelines. This is described in more detail in the guidance for stress-test participants.
3.5: The misconduct stress
Banks will be assessed against stressed misconduct costs beyond those already paid or provisioned for.
For the 2022 ACS, the Bank is using the same methodology as that applied in previous tests. That means the test will incorporate stressed projections for potential misconduct fines and other costs beyond those paid or provided for by the end of June 2022. Banks are asked to provide stressed projections for misconduct costs that relate to known misconduct issues and have a low likelihood of being exceeded.
4: Key features of the 2022 annual cyclical scenario stress test
4.1: Banks participating
Eight banks will take part in the ACS, including four ring-fenced bank subgroups for the first time.
The eight banks taking part in the 2022 ACS account for around 75% of lending to the UK real economy.footnote  These banks have a diverse range of business models and some operate in a broad range of international markets.
Since 2019, the largest UK banks have been required to separate core retail banking services from their investment and international banking activities, in order to ring-fence UK retail banking from shocks originating elsewhere in the group and in global financial markets.
For the first time in the ACS framework, and as announced previously,footnote  the Bank is including the ring-fenced bank subgroups of the existing stress-test participants on a stand-alone basis, where these differ materially from the group as a whole.footnote  This is in addition to the banking groups of these participants, which incorporate both ring-fenced and non ring-fenced entities.
Including ring-fenced banks in the ACS will deepen the Bank’s understanding of their exposures and sensitivity to stress, and of the independence of ring-fenced entities and the interaction with their groups. It will also support buffer setting for ring-fenced banks and provide greater assurance on their ability to maintain core UK retail banking services in a stress.
4.2: Qualitative review
The Bank will undertake a qualitative review of banks’ stress-test capabilities.
A key objective of the Bank’s concurrent stress-test framework is to support a continued improvement in banks’ own risk management and capital planning capabilities. As part of the annual stress test, the Bank conducts a review of participants’ stress-testing practices. The findings of that qualitative review are then fed back to firms. The Bank expects participants to demonstrate sustained improvements in their capabilities over time, in particular in any areas of weakness identified in the qualitative review.
In 2022 the Bank will carry out a Delivery Assessment, an assessment of submission quality (focused on errors and resubmissions and explanations provided for the stress results) across the different risk areas. Further details can be found in the guidance for stress-test participants.
4.3: Hurdle rate
Each bank will be assessed against ‘hurdle rates’ for their risk-weighted common equity Tier 1 (CET1) capital and Tier 1 leverage ratios.
A key determinant of whether a bank may be required to take action to strengthen its capital position in light of the ACS results is where its risk-weighted CET1 capital and Tier 1 leverage ratios fall to in the stress, relative to the level of capital banks are expected to maintain. This level is known as the ‘hurdle rate’.
The risk-weighted CET1 hurdle rate is comprised of each bank’s minimum CET1 capital requirements (that is the sum of the internationally agreed Pillar 1 common minimum standard of 4.5% of risk-weighted assets and any uplift to that minimum requirement set by the PRA, ie Pillar 2A); and any systemic buffers that a global or domestic systemically important bank is required to hold. As in previous tests, the hurdle rate framework embodies a dynamic approach to the calculation of banks’ Pillar 2A capital requirements through the course of the stress. This will allow the test to better reflect the probable impact of the stress on the risks captured in Pillar 2A.
A similar approach will be taken for the Tier 1 leverage ratio hurdle rate, which will incorporate the 3.25% minimum leverage ratio and additional leverage ratio buffers that reflect banks’ systemic importance. The hurdle rate framework set out here will apply to group consolidated and ring-fenced bank subgroup entities.
Since 2018 the Bank has adjusted hurdle rates in the stress test to take into account the impact of the IFRS 9 accounting standard. This will continue to be the case in the 2022 ACS.
In this year’s ACS, in line with the approach the Bank has used for stress testing since 2018, the Bank will assess participating banks’ results taking account of internationally agreed transitional arrangements for IFRS 9. These arrangements were put in place to help banks adapt to IFRS 9 and provide relief for capital impacts on a gradually reducing basis until 2024. To ensure transparency, the Bank will again also publish each bank’s CET1 and leverage low points on an assumed non-transitional basis.
Under IFRS 9, the losses in a given stress will be recognised and provisioned for earlier than under the previous accounting standard. All else equal, bank capital as measured under IFRS 9 is likely to fall more sharply in the early part of a stress as capital is drawn down earlier to raise provisions. This means that, when a stress occurs under IFRS 9, a bank will have more provisions for expected losses relative to the previous accounting standard and is thus likely to be as resilient, even though it will report a lower capital ratio.footnote  Nevertheless, the FPC and PRC recognise that at the beginning of a sudden real stress under IFRS 9 there is the potential for large capital drawdowns, as suggested by the non-transitional IFRS 9 results of previous stress tests, and thus possible risks to banks’ resilience and risks of procyclical effects.
The Bank continues to consider its approach for an enduring treatment for IFRS 9 beyond the 2022 ACS. To inform its approach, the Bank intends to engage with the ACS banks in the coming months to investigate any options they may have to factor the level of credit loss provisions required by IFRS 9 into their future planning.
4.4: Policy responses
The FPC and PRC will consider how banks perform in the test to determine if any actions are required.
In returning to its usual ACS framework, the FPC and PRC plan to return to the standard approach whereby the stress test, along with other relevant information, helps inform the setting of capital buffers for the banking system and its core banks. As in previous tests there is no mechanical link between the stress test results and the setting of capital buffers. Nor is the stress test a mechanical pass/fail regime.
Banks that fall below their hurdle rate will generally be required to take action to strengthen their capital position, if they have not already done so.
If a bank’s capital ratio was projected to remain above its hurdle rate, the PRC may still require it to take action to strengthen its capital position. Examples of factors the PRC might take into consideration in deciding whether action is needed include but are not limited to: the bank’s Tier 1 and total capital ratios under stress; the extent to which the bank had used up its capital conservation buffer in the stress; and the adequacy and quality of its recovery and resolution plans.
The stress-test results, and other relevant information – including any developments in the macro economy since the launch of the test – are used by the FPC and PRC to co-ordinate their policy responses to ensure the banking system as a whole, and individual banks within it, maintain sufficient capital to absorb losses and continue to supply credit to households and businesses even in a stress. The FPC and PRC can do so by adjusting capital buffers, namely the system-wide UK countercyclical capital buffer (CCyB) and the bank-specific PRA buffers.
There is no mechanical link between stress-test results and the setting of capital buffers. However, the aggregate system-wide impact on banks’ capital ratios of the UK economic part of the stress can be used by the FPC to help calibrate the setting of the UK CCyB rate, which is applicable to banks’ UK exposures.
Some banks may see their capital depleted by more than the aggregate effect of the UK economic component of the test. This could, for example, be because of the nature of their UK exposures or losses related to overseas and traded risk exposures. This additional effect is used by the PRC to help judge the appropriate size of bank-specific capital buffers. In making these judgements, the PRC considers all available information, including but not limited to the results of the ACS. It takes account of the level of the system-wide UK CCyB rate implied by the results of the test and, where applicable, how that differs from the UK CCyB rate set by the FPC. In doing so, it avoids inadvertently reducing or increasing the level of the system-wide capital buffer set by the FPC.
The PRC also considers any steps banks have taken to strengthen their capital position since the balance sheet cut-off date of the test, as well as banks’ risk management and governance capabilities. If the exercise reveals a bank’s capital position needs to be strengthened further, the PRC will consider the case for requiring additional capital actions.
4.5: Publication of results
The results of the ACS will be published in summer 2023.
The results of the 2022 ACS will be published in summer 2023. The Bank is committed to disclosing the information necessary to explain the results of the ACS. For 2022, this will include sufficient information on ring-fenced subgroups.
Annex: 2022 baseline macroeconomic scenario
The baseline scenario is broadly consistent with the central projections in the August 2022 Monetary Policy Report.
In addition to the stress scenario, banks are asked to provide projections under a baseline macroeconomic scenario.
As in previous tests, the paths for UK prices and activity in the baseline scenario have been developed by Bank staff and are broadly consistent with the central projections published in the August 2022 Monetary Policy Report. Similarly, the international macroeconomic variables are largely consistent with the latest projections from the IMF’s World Economic Outlook.
In the UK, annual GDP growth is projected to continue to slow, with the UK entering recession later this year. Output is projected to fall in each quarter from 2022 Q4 to 2023 Q4. Growth thereafter is very weak by historical standards. This contraction in output and weak growth outlook beyond that predominantly reflect the significant adverse impact of the sharp rises in global energy and tradable goods prices on UK household real incomes. The unemployment rate starts to rise above its current level from mid-2023 to a peak of 6.3%. Annual PPP-weighted world GDP growth averages 3.1% over the course of the scenario (Table A.1).
Annual UK CPI inflation is expected to increase further, peaking at 13.1% in the final quarter of 2022. Upward pressures on CPI inflation are expected to dissipate over time, as global energy prices are assumed to remain constant after six months, and as global bottlenecks ease and tradable goods prices fall back. CPI inflation is projected to fall back to the 2% target in two years’ time and to well below the target in three years’ time.
Bank Rate is assumed to rise to 3% by the middle of 2023, before falling back slightly.
UK residential property prices increase at an average annual rate of 2.7% over the five-year scenario, and CRE prices rise on average by 1.0%.
Table A.1: The variables in the baseline scenario are broadly consistent with the August 2022 Monetary Policy Report and the IMF’s World Economic Outlook
Average over five-year baseline scenario
UK GDP growth
World GDP growth
Euro-area GDP growth
US GDP growth
China GDP growth
UK unemployment rate
ACS – annual cyclical scenario.
CCyB – countercyclical capital buffer.
CRE – commercial real estate.
EME – emerging market economy.
FPC – Financial Policy Committee.
GDP – gross domestic product.
GFC – global financial crisis.
Hibor – Hong Kong interbank offered rate.
IFRS 9 – International Financial Reporting Standard 9.
IMF – International Monetary Fund.
Libor – London interbank offered rate.
OECD – Organisation for Economic Co-operation and Development.
ONS – Office for National Statistics.
PNFC – private non-financial corporation.
PPP – purchasing power parity.
PRA – Prudential Regulation Authority.
PRC – Prudential Regulation Committee.
SST – solvency stress test.
VIX – CBOE Volatility Index.
WEO – IMF World Economic Outlook.
The cut-off date for banks’ balance sheets for the ACS is end-June 2022.
Where appropriate, the unusual nature of the Covid-19 pandemic has been excluded.
The Bank uses a variety of methods to assess tail risk, one of which is GDP at risk (see, for example, Aikman et al (2019) and Lloyd et al (2021)). This examines how downside risks in a panel of advanced economies are linked to a range of macrofinancial variables, focusing over the medium term.
For more on spillover channels see Cesa-Bianchi et al (2021).
See July 2022 Financial Stability Report for further details.
The data cut-off point used for developing the stressed profiles is 26 July 2022, in line with the approach taken in the August 2022 Monetary Policy Report.
For UK variables, this severe point is the first percentile of the historical distribution. International variables are targeted at a percentile less far into the tail of the distribution, to account for the fact that such a large range of economies experiencing a stress at the same time itself increases the severity of the stress.
The overall approach is applied with some flexibility, with a broader assessment also factored in. For instance, the path for unemployment is also conditioned on the GDP profile.
See the Annex for further details of the baseline scenario.
See Box C of the Results of the 2021 Solvency Stress Test, December 2021.
This measure of output uses PPP weights.
The majority of government-backed loan guarantee schemes introduced during the pandemic are now closed and thus excluded from lending paths in the ACS. Reflecting the government’s latest policy, the Recovery Loan Scheme is assumed to close in June 2024. See Extension of the Recovery Loan Scheme.
The eight participating banks and building societies are: Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK, Standard Chartered and Virgin Money UK.
Four ring-fenced bank subgroups are included, for Barclays, HSBC, Lloyds Banking Group and NatWest Group. Santander UK and Virgin Money’s ring-fenced subgroups are not included on the basis that they do not differ materially from the group.