The Bank of England’s (BoE) 2021 solvency stress test (SST) shows the major UK banks are resilient to a severe path for the economy in 2021–25 on top of the economic shock associated with the pandemic that occurred in 2020. These results support the FPC’s judgement that the system is resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s (MPC’s) central forecast. Eight major banks are included in the test including, for the first time, Virgin Money UK.
Bank resilience in the test reflects a strong end-2020 starting point, with an aggregate Common Equity Tier 1 (CET1) capital ratio of 15.9%, and Tier 1 leverage ratio of 5.7% (excluding the software asset benefit that is due to expire at the start of 2022). That robust starting position is in part due to the build-up of capital since the global financial crisis, reflecting post-crisis reforms including higher capital requirements. Further support to capital ratios was provided by actions taken during 2020 by the banks, the BoE, including the PRA, and public authorities more broadly in response to the pandemic. These actions included the banks’ cancellation of final 2019 dividends.
The major UK banks’ aggregate CET1 capital ratio falls by 5.5 percentage points in the stress to a low point of 10.5%. A significant driver of this reduction is credit impairments, and the majority of these occur on UK-based lending. This low point compares to a 7.6% ‘reference rate’, which comprises banks’ minimum requirements and systemic buffers, and is adjusted to account for the impact of International Financial Reporting Standard 9 (IFRS 9). The aggregate Tier 1 leverage ratio low point of 4.8% is also above the reference rate of 3.7%. All eight participating banks remain above their reference rates for both CET1 capital and Tier 1 leverage ratios.