Bank of England to stress test bank resilience

<p>The Bank of England is to stress test banks and building societies to ensure they have enough cash to withstand major financial slumps.</p>

The Bank of England has revealed that it is to instruct eight of the biggest banks and building societies in the UK to develop defence mechanisms that allow them to withstand financial challenges.

Specifically, the Bank of England wants these institutions to have enough reserve capital to endure a 35 per cent dip in house prices and sudden increases in interest rates (of up to four per cent).

These stress tests, as they are known, would be carried out by the Bank's Prudential Regulation Authority, which experts say will ensure that the UK's economy does not implode as catastrophically as it has done in previous financial crises over the years.

"If a firm's capital ratio is projected to fall below the 4.5 per cent core equity Tier 1 ratio in the stress, there is a strong presumption that the Prudential Regulation Authority will require the firm to take action to strengthen its capital position," the Bank said in a statement.

News of this comes on the back of the European Central Bank's announcement that it is delivering a comprehensive review of assets held in banks within the eurozone.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.