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Lenders to face foreign investment scenario in Bank of England stress test

29 March 2017

The Bank of England's 2017 stress test will include an additional scenario which incorporates a "severe and synchronised United Kingdom and global macroeconomic and financial market stress", as well as an independent stress of misconduct costs.

Bank of England Governor Mark Carney said earlier this year that he did not believe leaving the European Union was the biggest threat to British financial stability, a view that has not changed.

Failure to meet these standards in the stress will generally result in banks being required to take action to improve their positions, if they have not already done so.

The latest stress test scenarios were released just as the Financial Policy Committee (FPC) warned financial stability could be compromised as businesses start to adapt to Brexit conditions. This "cyclical" test will incorporate an increase in interest rates.

The Bank's stress tests on seven leading lenders will, for the first time, include an exploratory scenario, which will examine banks' resilience over seven years of low growth and look at the viability of their business models. Barclays and Standard Chartered also missed some thresholds in last year's exercise.

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It added there would be contingency plans in place to manage potential risks as talks get underway from Wednesday.

"Sudden adjustment could disrupt the provision of market liquidity and investment banking services", the BoE said.

Increasing debt levels in China, vulnerable sovereign debt positions in Euro-area countries and greater uncertainty for global trade and financial integration were all notable risks to the global economy, the FPC said.

In a quarterly assessment, the BOE's Financial Policy Committee said that rapid growth in consumer credit could hurt the financial system if lax underwriting standards led to heavy losses for banks from souring loans.

It also threw up warnings over protectionist policies, noting greater uncertainty around support for global trade and worldwide financial integration - which it said has not yet been fully priced into financial markets.

Lenders to face foreign investment scenario in Bank of England stress test