Bank of England launches stress test for UK financial institutions

Banks and others will be investigated to assess their resilience to market shocks

Jon Cunliffe, deputy governor for financial stability at the Bank of England, says stress testing will provide valuable insights into the performance of UK institutions. Bloomberg

The Bank of England has begun to test the resilience of banks and other financial institutions to weather shocks similar to those of last year’s mini-budget upheaval.

It will put institutions through the test to help understand the risks to and those created by financial institutions apart from banks, the Bank of England said.

The exercise will also investigate how these organisations act under stress, and what drives their responses.

The investigation will also look into how the way the market works, can amplify shocks and put the financial stability of the UK at risk.

“We regularly run scenario exercises with a variety of firms which support our efforts to protect and enhance the stability of the UK financial system,” said Jon Cunliffe, deputy governor for financial stability.

“The launch of this exercise will provide valuable insight into the system-wide dynamics for banks and non-banks following a severe but plausible stress to financial markets.”

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It comes following the “dash for cash” in March 2020 and what the bank called the “adverse gilt dynamics” which followed September’s mini-budget.

Markets were cast into uproar in September, when new Conservative leader and prime minister Liz Truss set out her plan for the economy.

Much of the problem was in the market for government loans – known as gilts – which put pressure on so-called liability-driven investment funds, are used heavily by pension funds.

The Bank of England had to step in to help shore up some of these funds as they struggled to meet demand from investors trying to pull their cash out.

A final report on how the systems performed in the test will be published next year. It will not say how individual institutions did, however, but a list of all those who took part will be published.