UK Regulator Prepares Housing Stress Test

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.

via BBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza