UK banks face new stress test scenario by the Bank of England

The Bank of England has prepared new stress test scenarios to be given to the biggest banks in the UK to prepare for any sudden slowdown in foreign interests in UK assets. The Brexit vote last year has triggered a sharp drop in the value of the pound.

Seven major banks that will take part of the stress tests are Barclays, HSBC, Lloyds, RBS, Santander UK, Standard Chartered and Nationwide. The banks will have to prove and show that they have sufficient resources to cope up with any shocks in the future. This comes after the value of the pound dropped due to UK leaving the EU.

"As highlighted in recent financial stability reports, the United Kingdom's large current account deficit creates a vulnerability to a reduction in foreign investor appetite for UK assets and increases in funding costs for real-economy borrowers," the Bank of England said in a statement. The stress test would determine which banks will have higher interest rates on government bonds with an associated fall in sterling. UK banks will also have to show that they can cope with recession both globally and in the UK.

This means that banks should show high-interest rates at four percent with house prices falling by a third. Currently, the Bank of England's key interest rates stands at 0.25 percent. Analysts, on the other hand, said the UK stress test is similar to that set forth in 2016 but the global stress test looks tougher. Results of the stress test will be released between October and December.

UK banks have to remain a benchmark capital levels and if they fall below that level under the stress test scenario then they will be required to take action. This would mean raising capital or stopping dividend or bonus payments. Notably, RBS failed the test last year within which it had to submit a new capital plan. Barclay and Standard Chartered only passed the test after taking strategic management actions. 

The Bank of England also plans on making UK banks go under a second test called the explanatory scenario. The test is not focused on the adequacy of bank capital but rather about the banks' business models and sustainability.