(24 March 2025 – United Kingdom) The Bank of England (BoE) has adjusted its stress-testing scenario for British banks, opting for a less severe inflation surge and a milder global economic downturn compared to the previous year’s test.
Published on Monday, the 2025 stress test requires the UK’s largest banks to assess their resilience against a peak inflation rate of 10 percent and a 2 percent decline in global GDP. This marks a softening from the 2024 scenario, which modelled a UK inflation spike of 12 percent and a global economic contraction of 3 percent.
The BoE explained that changes in its assumptions – such as delaying the peak of the crisis and reducing its severity – were made to offset the full implementation of IFRS 9, an international accounting standard that alters how banks account for credit losses.
“All else equal, this updated method has resulted in a reduction in the starting size of some shocks in the stress scenario, although the impact on the aggregate capital drawdown is likely to be small,” the central bank stated.
Despite the overall relaxation, the latest stress test introduces a tougher challenge in trade. Banks must now model the impact of a 20 percent drop in global trade due to “heightened geopolitical tensions,” a figure exceeding both the trade contractions observed during the 2008 financial crisis and the COVID-19 pandemic. The scenario is also stricter than the 17 percent trade decline modelled in 2023.
The central bank highlighted that the test is “intended to be a coherent ‘tail risk’ scenario designed to be severe and broad enough” to gauge the sector’s resilience against adverse shocks. The results, covering the UK’s seven largest banks and building societies, will help determine capital buffer requirements.
A notable shift in methodology is that, unlike the previous year’s desk-based exercise conducted by BoE officials, banks will now submit their own projections. The BoE also adjusted assumptions on consumer credit losses and capital buffers to create “space for a greater capital drawdown.”
Since launching stress tests in 2014, the BoE has not required any UK bank to raise capital since the Royal Bank of Scotland was ordered to strengthen its balance sheet by £2 billion in 2016. The results of this latest exercise will be released in the final quarter of the year.