The Bank of England (BoE) has officially launched the 2025 Bank Capital Stress Test, a key initiative aimed at assessing the resilience of the United Kingdom’s banking system in the face of extreme financial and macroeconomic stress. The exercise will involve the country’s seven largest and most systemically important banks and building societies, and marks the successor to the Annual Cyclical Scenario (ACS).
The 2025 stress test introduces a comprehensive hypothetical scenario simulating a severe “tail risk” event. While the stress scenario is not a forecast, it is intentionally designed to be rigorous and wide-ranging enough to evaluate how well UK financial institutions can absorb significant shocks. The test aims to determine whether these institutions can continue providing essential financial services—such as lending to households and businesses—even during deep economic downturns, rather than amplifying market distress.
This year’s scenario integrates a combination of high-impact elements, including a severe global supply shock that triggers synchronized recessions in the UK and globally. Key assumptions include a 5% decline in UK GDP, a 2% contraction in global GDP, and a near doubling of UK unemployment to 8.5%, levels not seen since the 2008 global financial crisis. Additional stress elements include a 20% fall in world trade, a 28% drop in UK residential property prices, and peak inflation surging to 10% before normalizing back to the 2% target.
The Bank Rate, in this scenario, would rise dramatically to a peak of 8% before being lowered as inflation comes under control. Oil and gas prices are assumed to rise significantly as part of the simulated economic environment. The stress test also incorporates a financial markets and traded risk component, along with a misconduct cost scenario, reflecting the broader dimensions of financial system vulnerabilities.
Notably, this is the first stress test conducted following the expiry of transitional arrangements for the International Financial Reporting Standard 9 (IFRS 9), which became effective in 2018. IFRS 9 affects how banks recognize losses on financial assets. However, the Financial Policy Committee (FPC) has emphasized that the accounting changes should not lead to unwarranted increases in capital requirements. Adjustments made to this year’s test reflect an effort to remain aligned with the FPC’s and Prudential Regulation Committee’s (PRC) established tolerance for systemic risk.
The Bank of England will use the results of the 2025 stress test to determine appropriate capital buffer levels for both individual banks and the UK banking system as a whole. The results, expected to be published in the fourth quarter of 2025, will draw on both the BoE’s independent analysis and estimates submitted by the participating banks. These findings will also contribute to a broader understanding of vulnerabilities within the financial sector.
As outlined in the Bank’s updated “Approach to Stress Testing the UK Banking System” report, published in November 2024, the Bank of England plans to conduct these capital stress tests biennially moving forward. The insights gained will help shape regulatory responses and ensure that the UK’s largest financial institutions are prepared for a range of potential crises, reinforcing long-term financial stability.