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Since the financial crisis, stress testing has rapidly evolved and grown in importance for policymakers. Concurrent – or simultaneous – stress testing of the UK banking system was first conducted in 2014 and since then it has become the primary way for the Bank of England (‘Bank’) to assess the health of the banking system collectively and the main institutions within it individually. This bringing together of macro and microprudential objectives was novel and ambitious when set out by the Bank in its 2015 published approach.
Court commissioned the IEO to assess whether the aims of the 2015 approach have been achieved. The IEO also considered how well the framework was meeting policymakers’ continuing needs, mindful that the Bank intends to update its approach later this year.
The report shows that concurrent stress testing is delivering value to policymakers, participating firms and the industry more broadly. It serves both FPC and PRC needs by providing insights into risks affecting the system as a whole and a common and comprehensive scenario to compare firms against one another. This allows policymaking to be well integrated and well evidenced, which in turn supports significant credibility and accountability benefits. The openness of the exercise has proven particularly useful recently, as the tests have allowed the Bank to communicate its view of the resilience of the banking system under various Brexit scenarios. But the stress-testing framework is still maturing, and in this context the IEO has seen some opportunities for refinement.
The IEO’s recommendations fall under three themes. The first paves the way for more value to be extracted from this resource-intensive exercise, through suggestions to advance macro and microprudential objectives. The second theme provides insights to guide the Bank in enhancing delivery further, building efficiency and effectiveness. The final theme reflects on the challenges associated with communicating stress test outcomes. It makes recommendations for ensuring that internal, public, and bilateral firm communications all support stress testing objectives to the fullest extent possible.