Stress testing

What is stress testing?

Stress testing is used by the Bank to make sure the financial system, including banks and building societies, insurance companies and central counterparties, is strong enough to withstand severe scenarios such as a financial crisis. We set them ‘stress tests’ to find out if these sectors are prepared for the worst.

The Bank undertakes the following stress tests:

• System-wide stress testing
• Stress testing: banks and building societies
• Stress testing: insurers
• Stress testing: central counterparties
• Cyber stress testing

System-wide stress testing

In November 2024 the Bank published the conclusions of its first system-wide exploratory scenario exercise (SWES).

System-wide exploratory scenario exercise (SWES)

Stress testing: banks and building societies

Since 2014 the Bank has undertaken regular concurrent stress testing of the UK banking system to support the FPC and PRA in meeting their objectives. A concurrent bank stress test is an exercise where multiple banks’ balance sheets are subjected simultaneously to a common adverse scenario. Such tests allow us to assess individual banks’ and the banking system’s resilience to a range of adverse shocks and their ability to continue to support households and businesses if a stress does materialise.

The Bank of England’s approach to stress testing the UK banking system

In 2024 the Bank published its updated approach to stress testing the UK banking system. 

The publication looks back on the first ten years of concurrent stress testing and sets out in broad terms what we expect we will undertake in coming years. In summary:

1. The Bank expects to carry out a Bank Capital Stress Test every other year. This will be a test of risks related to the financial cycle in which the largest or most systemic UK banks participate. This can be seen as the successor to the Annual Cyclical Scenario exercises under the previous approach.
2. In intervening years, the Bank expects to use stress testing when appropriate to supplement its assessment of the resilience of the banking system, but in a way that is less burdensome for banks – for example, through desk-based stress tests. These may be similar to the desk-based stress tests that have taken place in recent years, such as in 2024.
3. The Bank will continue to use exploratory exercises as a means of assessing other risks, including structural and emerging risks that are not closely linked to the financial cycle. These can be seen as the successor to the Biennial Exploratory Scenarios under the previous approach.

Read the new approach, published 29 November 2024:

The Bank of England’s approach to stress testing the UK banking system

The 2024 desk-based stress test

We published the results of the 2024 desk-based stress test of the UK banking system on 29 November 2024.

• Stress testing the UK banking system: 2024 desk-based stress test results
• Stress testing the UK banking system: scenarios for the 2024 desk-based stress test
• Stress testing the UK banking system: variable paths for the scenarios for the 2024 desk-based stress test (pdf)
• Financial Stability Report - November 2024

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

• Clarification on IFRS 9 for 2017 ICAAP stress testing and capital planning
• Clarification on IFRS 9 for 2018 ICAAP stress testing and capital planning

Scenarios for banks and building societies not part of concurrent stress testing

The PRA published two stress test scenarios on 27 June 2024 for use by banks and building societies that are not part of concurrent stress testing. These scenarios are the same as those that will be used in the 2024 desk-based stress test of the banking system, as represented by the major UK banks and building societies, which the Bank also published on the 27 June 2024. The scenarios serve as a template and severity benchmark for firms to support their own internal capital adequacy assessment process (ICAAP) stress testing scenario design processes and can be found below:

ICAAP scenario variable paths

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).

The stresses applied under the scenarios are not a forecast of macroeconomic and financial conditions in the UK, or a set of events that are expected, or likely, to materialise. Rather, as per previous scenarios, they are coherent ‘tail risk’ scenarios designed to be severe and broad enough to assess the resilience of UK banks to a range of adverse shocks.

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 ICAAP and the supervisory review and evaluation process (SREP).  

How our scenarios should be used

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 firm’s resilience. 

Exploratory exercises

As part of the previous approach to stress-testing the UK banking system, in 2017, 2019 and 2021 the Bank undertook a type of concurrent stress test known as the ‘biennial exploratory scenario’ (BES). The focus changed from exercise to exercise and was designed to explore risks not covered by the annual cyclical scenario exercise. 

The 2017 exercise explored risks from persistently low interest rates and the results were published here: Stress testing the UK banking system: 2017 results

The 2019 exercise focused on liquidity risks and some of the key were published in the Financial Policy Summary and Record - March 2021.

2021 Biennial Exploratory Scenario: Financial risks from climate change

We published the results of the 2021 Biennial Exploratory Scenario: Financial risks from climate change on Tuesday 24 May 2022.  

The Bank of England (the Bank) has run its first exploratory scenario exercise on climate risk involving the largest UK banks and insurers. Launched in June 2021, the exercise was carried out under the Bank’s stress testing framework, in which biennial exploratory scenarios such as this one are run alongside annual solvency bank stress tests, and periodic stress tests for insurance firms

The 2021 Climate Biennial Exploratory Scenario (CBES) explored the resilience of the UK financial system to the transition and physical risks associated with different climate pathways. The CBES used three scenarios involving early, late and no additional policy action, respectively, 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 risks’; and risks associated with an increase in global temperatures known as ‘physical risks’.

• Results of the 2021 Climate Biennial Exploratory Scenario
• Climate Capital − speech by Sam Woods
• Key Elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change  

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 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.

• Supervisory Statement 19/16 ‘Solvency II: ORSA’

Insurance stress test (IST)

The PRA also runs its own stress tests on a periodic basis for a number of insurance firms. 

These exercises assess the financial resilience of the life and general insurance sector in severe but plausible common scenarios, tailored to the vulnerabilities of the sector. The participants for the exercises are selected on the basis of expected significant exposure to one or more of the proposed scenarios.

LIST 2025

The PRA will run the next life insurance stress test in 2025. 

• Life Insurance Stress Test 2025 request for technical input cover letter to firms (pdf)
• Approach to Life Insurance Stress Test 2025 (pdf)

DyGIST 2025

Update on the Dynamic General Insurance Stress Test. The DyGIST launch has been postponed and is now expected to commence in May 2026.

• Update on the Dynamic General Insurance Stress Test

The PRA will run the next general insurance stress test in 2025. 

• PRA statement on the dynamic general insurance stress test in 2025

IST 2022

Stress testing - Insurers

On Monday 23 January 2023, we published the Insurance Stress Test 2022 letter. This letter sets out our findings on sector resilience and provides thematic observations that support improvements in risk management.  

Stress testing: central counterparties (CCPs)

CCPs enable the clearing of financial transactions, acting to guarantee that a transaction will be honoured if a party defaults on a trade. The Bank supervises CCPs because of their importance to the smooth functioning of the financial system and wider economy. 

International standards and UK legislation set firm expectations and requirements that UK CCPs perform daily stress testing to size, and assess the sufficiency of, financial resources from both a credit and liquidity perspective. The Bank also intends to conduct regulatory supervisory stress tests of CCPs as part of its ongoing supervision and regulation of financial market infrastructures (FMIs).

On 21 June 2021, the Bank published a Discussion Paper on Supervisory Stress Testing of Central Counterparties. This set out the Bank’s intention to develop and publish a regime for CCP supervisory stress testing in the UK, and sought feedback on the design of such a regime. This Discussion Paper explained that the Bank intends to use CCP supervisory stress testing as a key mechanism through which to undertake assessments of the resilience of individual CCPs, and assessments of the broader resilience of the clearing network and its interactions with the rest of the financial system. 

• Discussion Paper: Supervisory Stress Testing of Central Counterparties

On 19 October 2021, the Bank launched its first public supervisory stress test of UK CCPs. This exercise assessed the credit and liquidity resilience of the UK CCPs under a severe market stress scenario and the simultaneous default of selected clearing member groups. The 2021–22 CCP supervisory stress test was exploratory in nature, aiming to identify potential vulnerabilities or gaps in resilience, rather than testing CCPs against a pass-fail threshold. The Bank published the results of 2021–22 CCP supervisory stress test on 13 October 2022.

• Bank of England launches first public CCP supervisory stress test
• Results of the Bank of England 2021–22 central counterparty supervisory stress test published
• 2021–22 CCP Supervisory Stress Test: results report

In March 2023, the Bank launched its 2023 CCP Supervisory Stress Test. As part of the launch of this exercise, the Bank published a Key Elements document setting out the details of the exercise. The Key Elements document included details on the participants of the exercise, its objectives, analytical components, and the market stress scenarios. In November 2023, the Bank published the results report for its second CCP Supervisory Stress Test exercise. 

• Key elements of the 2023 supervisory stress test

2023 CCP SST market stress scenarios (XLSX)

2023 CCP Supervisory Stress Test: results report

In April 2024, the Bank launched its 2024 CCP Supervisory Stress Test. As part of the launch of the exercise, the Bank published a Key Elements document setting out the details of the exercise. The Key Elements document includes details on the participants of the exercise, its objectives, analytical components, and the market stress scenarios. In November 2024, the Bank published the results report for its third CCP Supervisory Stress Test exercise, the 2024 CCP SST.

• Key elements of the 2024 supervisory stress test

2024 CCP SST market stress scenarios (XLSX)

2024 CCP Supervisory Stress Test: results report

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.

On 29 March 2023, we published the thematic findings from the 2022 cyber stress test. The findings support individual and collective work to improve the financial sector’s response to and recovery from incidents.

Stress testing updates