Tougher tests announced for UK's biggest banks

The UK's largest banks will be assessed on their ability to weather certain economic scenarios, such as persistent low interest rates and high costs, allowing the Bank of England (BoE) to see how the financial system would fare under challenging circumstances.

The new 'exploratory' test will be carried out every other year in addition to the annual stress test that the seven largest lenders are already required to undertake, the Financial Times reports.

The new test is more long-sighted with banks required to submit projections for seven years – but the BoE assured lenders that they will not publish a full breakdown of the results.

An advisor quoted in the FT said that the test represents 'uncharted waters for both the BoE and banks' with no other central bank having launched a test of this nature before.

The BoE suggested economic uncertainties brought about by Brexit have impacted its thinking on the test.

'Risks to financial stability will be influenced by the orderliness of the adjustment to the new relationship between the United Kingdom and the European Union,' the bank said.

The BoE confirmed that its Financial Policy Committee will be responsible for overseeing banks' contingency plans to mitigate risks as the process for withdrawing from the EU unfolds.

In addition to the new test, the Prudential Regulation Authority (PRA) is to launch a review into banks' lending standards in relation to consumer credit following the soaring growth of the sector.

The PRA will look closely at underwriting standards and the risk models employed by banks.

In 2016, banks had £19bn of impairments on credit cards, making consumer credit the largest single risk on a lender's balance sheet.

The BoE also announced a change to its annual stress test – undertaken by Barclays, HSBC, Royal Bank of Scotland, Lloyds Banking Group, Santander UK, Standard Chartered and Nationwide – which means banks will be more stringently tested in areas where the BoE thinks risks have grown.