Key elements of the 2021 stress test

The 2021 solvency stress test will assess the major UK banks and building societies against a UK and global scenario that reflects a severe path for the current macroeconomic outlook.

The Bank’s approach to concurrent solvency stress testing aims to use periods when the economy is growing to build up banks’ buffers of capital, ready to be drawn on to support the economy in a stress. Once the economy enters a real stress the focus changes. At this point stress tests are used to assess whether the buffers of capital that banks have built up are large enough to deal with how the prevailing stress could unfold.

The results of the 2021 solvency stress test will act as a cross-check on the Financial Policy Committee’s (FPC’s) judgement of how severe the current stress would need to be in order to jeopardise banks’ resilience and challenge their ability to absorb losses and continue to lend. It will therefore cross-check the judgement that the banking system is resilient to a reasonable worst-case stress in the current environment. It will also support the Prudential Regulation Authority’s (PRA’s) objective of promoting the safety and soundness of PRA-regulated firms.

There will be no mechanical link from the results to regulatory response. But the outcome of the test will be used to update the FPC’s judgements about the most appropriate ways in which the banking system can continue to support the economy through the stress. It will also be used as an input into the PRA’s transition back to its standard approach to capital-setting and shareholder distributions through 2021.


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Evaluation of the Bank of England’s approach to quantitative easing


In 2009, the MPC began a programme of asset purchases or quantitative easing (QE), intended as a temporary measure to support the economy in the aftermath of the Global Financial Crisis. But a decade on from its introduction in the UK, QE has become bigger, broader and more persistent than expected. 

In 2019 the Bank’s Court commissioned the IEO Evaluation of the Bank’s approach to QE. The IEO was asked to carry out an end-to-end evaluation of the QE rounds between 2009 and 2016. That covers the Bank’s understanding of how QE works, tool design and implementation, governance and risk management and communication. 


The report shows that the Bank has delivered asset purchase programmes effectively. There has been impressive and collaborative staff input to deliver innovative programmes at pace over a number of rounds of QE. The Bank’s researchers made a valuable contribution to the growing literature on the effects of QE – especially in the early stages. The Bank has developed strong governance and risk management to underpin delivery of QE. The bespoke technical infrastructure that facilitates purchases has proved resilient, overseen by experienced staff. And the Bank has honed its communications on what is a complex tool. As a new tool, QE brought a range of new challenges. And as the size and persistence of QE has grown, so has the importance of learning about how it works, ensuring its robust implementation and building public understanding of the tool. These challenges motivate our recommendations.


The IEO’s recommendations fall under three themes. The first considers how the Bank can continue to advance and apply its technical understanding of QE, given that important knowledge gaps remain. The second looks to ensure that the governance and implementation of QE remain fit for the future, recognising the complexity and risk considerations of asset purchases. And the third focuses on building public understanding and trust in QE, a tool which remains poorly understood and often contentious. Taken together these three themes and accompanying recommendations can help to reinforce QE’s role in the Bank’s toolkit. And the lessons from the first decade of using QE can also inform the Bank’s approach to future policy design.


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The final countdown: completing sterling LIBOR transition by end-2021

News release

The LIBOR administrator, ICE Benchmark Administration, is consulting on ceasing publication of all sterling LIBOR settings at the end of 2021, leaving just one year for firms to remove their remaining reliance on these benchmarks.

This issue touches numerous parts of the economy. LIBOR has been embedded in the financial system for many years, used to calculate interest in everything from corporate borrowing and intra-group transfers, to complex derivatives. It is also utilised in accounting practices, system infrastructure and other supporting functions. All of these will need to be ready to use alternative reference rates, such as SONIA, by the end of this year.

The Bank of England and the Financial Conduct Authority (FCA) have set out clear expectations for regulated firms to remove their reliance on LIBOR in all new business and in legacy contracts, where feasible. The primary way for market participants to have certainty over the economic terms of their contracts is to actively transition them away from LIBOR.

In support of this, the Working Group on Sterling Risk-Free Reference Rates (the Working Group) has published an update to its priorities and roadmap for the final year of transition to help businesses to finish planning the steps they will need to take in the coming months.

The Working Group’s top priority is for markets and their users to be fully prepared for the end of sterling LIBOR by the end of 2021. In particular the Working Group has recommended that, from the end of March 2021, sterling LIBOR is no longer used in any new lending or other cash products that mature after the end of 2021. All businesses with existing loans in sterling should already have heard from their lenders about the transition, and those seeking a new or refinanced loan today should be offered a non-LIBOR alternative. Throughout the remainder of the year, existing contracts linked to sterling LIBOR should be actively transitioned where possible.

In addition, the Working Group has recommended that firms no longer initiate new linear derivatives linked to sterling LIBOR after the end of March 2021, other than for risk management of existing positions or where they mature before the end of 2021.

The Working Group, the Bank of England, and the FCA have made clear that, in future, they anticipate that the large majority of sterling markets will be based on SONIA compounded in arrears, to provide the most robust foundation for the overall market structure. However, in certain specific parts of the market, participants may need access to alternative rates. In this context, the Working Group welcomes the development of term SONIA reference rates (TSRRs) which are beginning to be made available by various providers. Alongside this, the Working Group has engaged closely with the FICC Markets Standards Board (FMSB) to support development of a market standard for appropriately limited use of TSRRs, consistent with the Working Group’s objectives and existing recommendations on use cases of benchmark rates. The proposed FMSB standard is under review by key stakeholders during January and is expected to be released for public comment in February.

The Bank of England and the FCA continue to work closely with firms to secure a smooth transition. In particular, supervisors of regulated firms will continue to expect transition plans to be executed in line with industry-recommended timelines across sterling and other LIBOR currencies. Senior managers with responsibility for the transition should expect close supervisory engagement on how they are ensuring their firm’s progress relative to industry milestones.

Tushar Morzaria, Chair, Working Group on Sterling Risk-Free Reference Rates, commented: “In line with the Working Group’s milestones for Q3 2020, lenders should now be in a position to offer loans based on SONIA or other LIBOR alternatives. I encourage all end users to engage with their lenders and trade associations as early as possible to ensure a smooth transition.”

Andrew Hauser, Executive Director for Markets at the Bank of England commented: “As we move into the final year for sterling LIBOR transition, it is crucial that firms take action now to make certain they are prepared well in advance of the end of 2021.”

Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, commented: “The end-game for LIBOR is now increasingly clear. Firms should now have everything they need to shift new business to SONIA and to complete their plans for transition of legacy exposures. There is no longer any reason for delay.”


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