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BoE- A framework on stress testing the UK banking systems

The Bank of England (BoE) has published a discussion paper called “A framework for stress testing the UK banking system”.  The paper sets out the key features of the proposed stress-testing framework in the medium term.  These include:

  • the expected coverage of institutions;
  • considerations around scenario design and the approach to modelling the impact of scenarios on bank profitability and capital ratios; 
  • how the outputs of stress tests could be used to inform policy decisions by the
    FPC and PRA Board; and
  • options around disclosure of stress test results.

The paper sets the BoE's expectations that senior management must devote appropriate resources to the necessary upgrade of their data infrastructure to enable them to service internal and external data needs easily.  The infrastructure investment should not be devoted solely for the purposes of this data submission but should also be effected to improve the bank's own data reporting and
aggregation capabilities and enhance the bank's ability to provide clean and
timely data for other complementary data initiatives.  The BoE commented
that based on PRA's observations to date, this may require some banks to raise
the profile of their data initiatives materially.  Box 6 on page 36 sets out the detail for Data Submissions. 

The deadline for comments is 10 January 2014

The importance of the stress test data to the BoE’s approach was detailed in a speech by the Deputy Governor of the BoE in which the challenges of banking reform were discussed.  Mr Tucker emphasised the disconnect between the Concordat, the Core Principles and the Capital Accord.  He explained "put another way, each of the three BCBS documents does an important job but none of them addresses the distribution of capital across a group, this is a gap".  He considers
that stress testing - not only of banks but of CCPs and, in time, of other
intermediaries can help expose these fault lines.  It can help to calibrate micro and macro prudential policy.  Good stress testing for which the BoE can be held to account will make it easier to explain and defend the standards that are required.

 Related Links:

BoE paper

http://www.bankofengland.co.uk/financialstability/fsc/Documents/discussionpaper1013.pdf

Speechhttp://www.bankofengland.co.uk/publications/Pages/speeches/2013/682.aspx

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