The Bank of England has today announced that it will apply new stress tests to Britain's biggest banks and building societies over the next three years, taking into account both domestic and global risks.
Stress tests look at how banks would fare in hypothetical situations, with regulators assessing whether the banks would still be able to lend money in difficult economic conditions.
The Bank said today that it is introducing two separate stress tests, looking at cyclical and wider risks, respectively. The test tied to the financial cycle will be run every year, while an "exploratory" test will take place every other year.
The annual test will take into account factors such as property and asset prices, the pricing of risk in financial markets, and the levels and growth rate of credit.
The biennial test will explore risks that are more difficult to anticipate, such as the impact of currency pegs or the stability of the commodities markets.
The Bank ran its first stress test last year. The results of a second stress test are set to be published on 1st December. Under the Bank's plans, next year British banks will be subject to one stress test from the UK regulator and another from the European Banking Authority (EBA). In 2017, the Bank will run both its "cyclical" and "exploratory" tests, followed by just one cyclical test in 2018.
The Bank is expected to set out further details about tests in 2019 and beyond - with the tests expected to change in order to apply to so-called ringfenced banks.
For now, the tests will only apply to banks and building societies with total retail deposits greater than £50bn. The Bank had considered extending the tests to UK subsidiaries of foreign-owned banks, but said today that way will "not be brought into scope at this time".