London, Oct 2: Bank of England (BOE) unveiled plans for stress testing of British banks which could see increases in the amount of capital they are obliged to hold.
“Looking to 2014 and beyond, the Bank and Prudential Regulation Authority (PRA) should develop proposals for regular stress testing of the British banking system. The purpose of those tests would be to assess the system’s capital adequacy,” the bank said in a paper.
The bank’s position as spelt out in a discussion paper that follows recommendations from the Financial Policy Committee (FPC) of the BOE in March 2013, Xinhua reported Tuesday.
Details include the expected coverage of institutions, considerations around scenario design, and the approach to modelling the impact of scenarios on bank profitability and capital ratios.
It discusses how the outputs of stress tests could be used to inform policy decisions and options around disclosure of stress test results.
The BOE has already been running stress tests on banks on an ad hoc basis in the wake of the 2008 financial crisis.
In a speech Tuesday in London, BOE deputy governor Paul Tucker examined how a clear framework for stress testing banks and other key financial institutions can help micro and macro-prudential regulators.
Tucker said a “stress testing regime can enhance the quality of the bank’s macro and micro prudential supervision and over time, underpin confidence in the banking system”.
“Policymakers need a good framework for assessing banks’ capital adequacy in different circumstances, both at the level of the system a whole and for individual firms,” said Tucker.