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Banks pass the latest stress test challenge!
The Bank of England has published their latest stress test results and even in the most pessimistic scenario, all of the main commercial banks were able to show that they have sufficient capital reserves to withstand a severe negative shock to the UK economy.
There are worries about the impact of a disorderly Brexit on the UK financial system - but in the worst case scenario that the Bank imagined for the tests including a 33% fall in house prices, a rise in interest rates from 0.5% to 4% within two years, and the unemployment rate rising to 9.5% from its current rate of 4.3% all of the banks came through with enough of a capital buffer.
Stress testing is now an important part of the system of financial regulation and management in the UK economy. Stress tests use tail-end risk events i.e. economic outcomes that lie well outside the mainstream forecasts. A failure to adequately insure against tail-end risk was a major reason behind the severity of the global financial crisis a decade ago.