The Bank of England announced on Wednesday that it is tweaking stress tests in the UK banking sector to include fallout from the coronavirus pandemic.
The BoE has set out a worst-case scenario for the economy which it will test British lenders against.
The 2021 stress test will use periods when the economy is growing to build up banks’ capital buffer, so it is ready to withstand a financial shock, as seen throughout 2020.
The results will enable a cross-check on the Financial Policy Committee’s judgement of how severe the situation would need to be to risk banks’ ability to absorb losses and continue to lend.
Those outcomes, which are consistent with the potential double-dip recession, will be used to update the FPC’s decisions on how to support the economy through difficult periods.
In the worst-case scenario, house prices will fall 33 per cent at the worst point of the crisis while unemployment will peak just below 12 per cent.
£800bn could be wiped off the economy over three years, according to the test, which is 37 per cent of the pre-pandemic figure.
The Bank of England affirmed that these scenarios are very unlikely but worst-case projections are necessary in cross-checking the banking system’s capabilities.
The economy shrank by 10 per cent last year but house prices rose 7.6 per cent.
Unemployment is up 1 per cent to 4.9 per cent since the start of the pandemic.
Britain has been the worst hit European nation by Covid-19 with a death toll of more than 93,000.
The government is pinning its hopes on a vaccine-driven recovery, with almost 5 million people having already received their first dose.