The Bank of England will test lenders’ ability to withstand a 35 per cent fall in house prices and a rise in interest rates to 4 per cent under stress-testing proposals to be carried out later this year.
In January the European Banking Authority announced a stress test which will assess the resilience of banks across the EU.
Today the Bank of England has announced details of its own stress test which will run alongside the EBA initiative.
It will test eight major banks and building societies against a 35 per cent drop in house prices, interest rates of 4 per cent, a 3.5 per cent decline in GDP and a rise in the unemployment rate to 12 per cent.
Bank of England governor Mark Carney says although the events in the stress test scenario are “extreme”, the test will ensure the UK financial system absorbs rather than amplifies shocks.
He says: “Much has been achieved in recent years to put the UK banking system on a sounder footing, so that it can support the UK recovery.
“The challenge now is to secure a strong, sustainable and balanced economic expansion. The Bank’s annual stress test will help ensure our banks support that expansion by remaining resilient.”
According to Nationwide, house prices dropped 20 per cent during the last financial crisis. The average price peaked at £184,723 in September 2007 and bottomed out at £147,746 in February 2009.