What you need to know about the Bank of England's stress test on Wednesday

Hayley Kirton
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What will Wednesday have in store for the nation's biggest lenders? (Source: Getty)

Wednesday will be judgement day for lenders across the UK, as the Bank of England is due to release its most recent set of stress test results.

The annual stress test is designed to measure the financial health of the UK's seven major lenders – Barclays, HSBC, Lloyds Banking Group, Nationwide Building Society, the Royal Bank of Scotland Group, Santander UK and Standard Chartered – and aims to make sure the institutions have enough capital to keep themselves propped up if the economy goes pear-shaped.

This year's test will examine how the six banks and one building society would fare across a five-year period if there was another global economic crisis similar to that in 2008, and includes tanking oil prices to $20 per barrel, a 31 per cent nosedive in house prices and a sharp 4.5 percentage point rise in the rate of unemployment.

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Unlike in other years, the capital hurdle rate banks must leap over is different and attempts to better reflect an additional buffer those lenders which are global systemically important banks are expected to hold.

However, the tests could be about to get even harder as, from 2017 onwards, the participating banks will be tested against two different scenarios.

The Bank of England, which is in its third year of running the banks through stressful scenarios, is not the only organisation to carry out stress testing. Over the summer, stress test results were released from both the European Banking Authority (EBA) and the US Federal Reserve.

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This July's EBA results covered four UK banks – Barclays, HSBC Holdings, Lloyds Banking Group and the Royal Bank of Scotland Group.

The results were not particularly glowing for either RBS, which, with capital ratios plunging from 15.6 per cent to 8.1 per cent, was among the banks whose capital was eroded away the most, or Barclays, whose capital ratio fell from 11.4 per cent to 7.3 per cent in the test scenario.

The EBA test also found that HSBC's capital ratio would drop from 11.9 per cent to 8.8 per cent and Lloyds from 13 per cent to 10.1 per cent.

The Bank of England is also due to release its Financial Stability Report on Wednesday.

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