The new scenario will consider how the resilience of the UK banking system might evolve if "recent headwinds to bank profitability persist and intensify".
The test will incorporate weak global growth, persistently low interest rates, falling world trade and cross-border banking activity, increased competitive pressure on large UK banks from smaller banks and non-banks and a continuation of costs related to misconduct. It will have a seven-year horizon to capture these long-term trends and will act as a complement to the annual cyclical stress test.
For the global economy, the stressed outcome is worse than in 2016, which the Bank says largely reflects the continued rapid growth of credit in China.
The Bank added that the United Kingdom’s large current account deficit creates a vulnerability to a reduction in foreign investor appetite for UK assets and increases in funding costs for real-economy borrowers. The 2017 cyclical scenario therefore incorporates a sudden increase in the rate of return investors demand for holding sterling assets and an associated fall in sterling.
The scenario also incorporates a rise in Bank Rate, differentiating it from the 2016 exercise, in which Bank Rate was cut to zero. This aspect complements the exploratory scenario, in which interest rates persist at very low levels. Together the two scenarios will allow the impact on banks of both rising and persistently low Bank Rate to be assessed.
The benchmarks — or hurdle rates — above which banks will be expected to maintain their capital positions in the 2017 cyclical scenario have been set on the same basis as in the 2016 test. All participating banks will be expected to meet their minimum CET1 capital requirements, which averaged 6.5% in 2016, with globally systemic banks held to a higher standard. Failure to meet these standards in the stress will generally result in banks being required to take action to improve their positions, if they have not already done so.
