Stress testing

We use stress testing to assess the health of UK banks, building societies, insurers and central counterparties.

What is stress testing?

We need to make sure banks, insurance companies and central counterparties are strong enough to withstand another financial crisis. So we set them ‘stress tests’ to find out if they are prepared for the worst.

A video about Stress-testing.

  • Hi my name is Noor and I work at the Bank of England. Here at the Bank of England, we need to keep an eye on how banks would cope with difficult economic situations. We do this by stress testing banks, against various hypothetical scenarios. The Bank of England then ensures that should these situations occur, banks hold sufficient capital to meet unexpected losses.

    From 2016, we will use two ‘what if’ scenarios to test banks. The first will be a yearly test of shock scenarios of different levels of severity, based on the UK current economic cycle. The annual cyclical scenario could include falls in output or house prices or increases in interest rates or unemployment. The second will be an exploratory scenario every two years. This scenario will look at risks that are unlikely to happen but are still a concern, for example what might happen if a large bank fails. Banks have always been required to hold a minimum amount of capital to absorb losses, but from 2016 how the Bank of England looks at stress test performance is changing. With larger and more risky banks needing to carry more loss absorbing capital.

    Should a bank not perform satisfactorily, the Bank of England has a range of powers, such as requiring the bank to take action to strengthen its capital position within a certain period of time.

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 three types of banking stress test:

  1. We run an annual concurrent stress test of the largest UK banks and building societies. This informs the setting of capital buffers by our Financial Policy Committee and our 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.
  3. Every other year, we run an additional scenario intended to probe the resilience of the banking system to risks that may not be neatly linked to the financial cycle – the biennial exploratory scenario.

Data templates, manual and dictionary for the annual concurrent stress test 2022

The Bank publishes concurrent stress test data requests to participating firms, for submission in Excel. These Excel templates, manual and dictionary are for data submissions by firms for the 2022 Concurrent Stress test, and are all part of the Stress Test Data Framework (STDF).

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

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

The PRA published two stress test scenarios on Friday 14 October 2022 for use by banks and building societies that are not part of the annual concurrent stress testing exercise. These scenarios have been derived from the 2022 Annual Cyclical Scenario (ACS 2022) scenario which was published on Monday 26 September 2022 to support stress testing of the largest UK banks and building societies. 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 the scenarios should be used

You should consider the stress test scenarios in the context of your business and its own specific risk drivers. The 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.

Biennial exploratory scenario

Since 2017, we have also run a second type of concurrent stress test. Conducted every other year, this is known as the ‘biennial exploratory scenario’ (BES). Its focus changes from exercise to exercise, and is designed to explore risks facing banks not covered by the annual bank solvency focused test. Previous tests have covered risks from persistently low interest rates and liquidity risks.

Results of the 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’.

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.

Insurance stress test (IST)

The PRA also runs its own stress tests on a periodic biennial 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

IST 2019

On Wednesday 17 June 2020 the PRA published a feedback for general and life insurers from the 2019 Insurance Stress Test.

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.  

On Thursday 20 January 2022, the PRA published a letter to the largest life and general insurers, requesting technical input for near final scenario specifications, instructions, data templates as well as qualitative Results and Basis of Preparation (RBP) report for the 2022 Insurance Stress Test exercise. 

On Wednesday 4 August 2021, the PRA set out the high-level scope for the 2022 Insurance Stress Test exercise in a letter to the largest life and general insurers. 

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. 

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.

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. 

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

This page was last updated 19 April 2024