New assessment to gauge banking sector's ability to withstand severe economic shocks
The Bank of England has introduced the 2025 Bank Capital Stress Test, a new biennial assessment of the financial resilience of the UK’s seven largest banks and building societies.
This exercise replaces the previous Annual Cyclical Scenario (ACS) and aims to evaluate how major lenders would withstand a severe economic downturn. The scenario includes simultaneous UK and global recessions, steep asset price declines, rising global interest rates and elevated misconduct costs.
The central bank clarified that the test does not reflect a prediction of future economic conditions. Instead, it is designed to model a severe yet plausible “tail risk” scenario, enabling the Financial Policy Committee (FPC) and Prudential Regulation Committee (PRC) to assess whether UK banks could maintain their core services during a crisis.
The 2025 stress test includes three components: a macroeconomic downturn, stresses in financial markets and trading activities, and elevated misconduct-related expenses.
Under the macroeconomic scenario, UK GDP is projected to fall by 5% in the early part of the test. Global GDP declines by 2%, while UK unemployment almost doubles, reaching a peak of 8.5%. World trade contracts by 20%, and oil and gas prices rise sharply. Inflation is expected to peak at 10% before falling back to the 2% target. The bank rate increases to a high of 8% before easing as inflation returns to target. Meanwhile, UK residential property prices drop by 28%.
This will also be the first stress test conducted following the end of transitional arrangements for IFRS 9, the accounting standard introduced in 2018. The FPC has assessed that the adoption of IFRS 9 should not result in higher capital requirements across the system. Consequently, the Bank of England is making adjustments to its methodology while maintaining its overall risk tolerance.
Test results will incorporate modelling by both the Bank of England and participating institutions. Findings will be published in the fourth quarter of 2025, and will guide decisions on capital buffers for individual banks and the wider financial system.
In line with its updated approach released in November 2024, the central bank plans to conduct similar exercises every two years.
Rahul Choudhary, director of risk at financial consultancy Broadstone, noted that the new stress test replaced the ACS following significant global economic shocks such as the global pandemic, the surge in interest rates and significant volatility in markets, currencies and supply chains.
“In this context, many of the stress tests like a sudden drop in global or UK GDP, sharp price rises in oil and gas and a property crash suddenly seem more relevant,” Choudhary said.
“The Bank of England has committed to holding a stress test every other year moving forward, which should provide reassurance around the resilience and capital strength of the UK’s banking sector.”
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