Stress testing the UK banking system: 2022/23 Annual Cyclical Scenario results

The Bank of England’s Prudential Regulation Authority (PRA) has released the results of the 2022/2023 annual cyclical scenario (ACS) stress test of banks and building societies. This latest stress test focused on a severely adverse macroeconomic situation with a persisting high inflation, further increases in global interest rates, an onsetting recession in UK with significantly higher unemployment, and a sharp decline in asset prices. The test was meant to measure the resilience of bank and building societies in case any such stress may materialize, although this is not expected.
Below is a brief summary of the results; for more detailed, comprehensive information, please refer to the enclosed report.
The results of the 2022/23 annual cyclical scenario stress test show that major UK banks would be resilient to a severe stress scenario as described above. In fact, all participating banks and building societies remained above their minimum capital requirements on an IFRS 9 transitional basis, and no bank needed to strengthen its capital position as a result of the test.
The positive results can be primarily traced back to institutions‘ ability to cut dividend payments, employee variable remuneration, and coupon payments on Additional Tier 1 instruments during times of stress which enables them to enhance their liquidity position. Although hypothetical, the Financial Policy Committee (FPC) emphasizes the importance of investors being aware that banks would take such actions if a stress scenario were to materialize.
Additionally, the PRA notes that banks‘ and building societies‘ starting position before this latest stress test was quite different than before: Banks started the stress test with improved asset quality since the last cyclical stress test in 2019 due to conservative lending standards, changes in banks‘ balance sheets, and increased residential property prices. This helped mitigate the negative effects of the macroeconomic shocks. Furthermore, banks started the stress test with higher deposit balances than in recent years which in this case somewhat counteracted against rising interest income from loans.
To conclude, the PRA notes that the results confirmed the expectations of the FPC and demonstrate that UK banks and building societies would be able to support UK businesses and households even during a prolonged period of stress.