BOE to Conduct Bank Stress Tests

The Bank of England is willing to put aside its own forward guidance to determine how well the country’s eight largest lenders would fare in a crisis. Governor Mark Carney has said rate increases from the current record-low 0.5 percent are likely to be gradual and the peak in rates lower than in previous cycles. Yet in its stress test of the U.K.’s eight largest banks, the BOE assumes an increase to 4 percent by the end of 2015.

“You could argue that going to 4 percent is against their own policy,” said Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee and a professor at the London School of Economics. “I think it’s actually quite courageous, and better than the ECB did, to include in the scenario a feature which in some sense is against their current policy.”

The BOE scenario will examine whether U.K. lenders could survive the interest-rate spike coupled with an economic and financial catastrophe so severe that it’s only happened once in the last 150 years. How they fare will be revealed on Dec. 16.

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