Eight UK banks and building societies will face so-called stress tests, to assess their resilience to an economic downturn, the Bank of England has announced.
The test will measure the impact of a “very severe housing market shock” and a sharp rise in interest rates.
That scenario will include unemployment rising to 12% and house prices falling by up to 35%.
The Bank said the tests would ensure the UK financial system’s resilience.
Governor Mark Carney said “the events depicted in this stress-test scenario are extreme, and thus highly unlikely to transpire”.
Nevertheless, he said they would “ensure that the UK financial system remains one that absorbs rather than amplifies shocks”.
The scenario also includes a collapse in the value of sterling, GDP falling by 3.5% below its level at the end of 2013 and consumer prices index (CPI) inflation rising to 6.5%.
Under these conditions, the Financial Policy Committee (FPC) will decide whether the eight banks would remain solvent.
If not, they could be ordered to increase their capital reserves.
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