UK banks face stress tests on impact of energy crisis defaults
The UK’s largest banks will be tested on their ability to withstand a rise in defaults linked to sky-high energy prices, as part of the Bank of England’s delayed health check of the financial industry.
The Guardian understands that Threadneedle Street has crafted a new crisis scenario that will feature a deep economic recession, punctuated by soaring energy bills that could make it harder for some borrowers – particularly businesses – to afford loan repayments.
It comes as UK businesses await details of Liz Truss’s £150bn energy bills bailout package, which the new prime minister last week pledged would temporarily cap sky-high bills for companies that might otherwise be forced to close.
This year’s stress-test scenario will also feature a drop in asset prices, a further jump in interest rates and soaring costs to cover misconduct. Any lenders deemed too weak to cover these eventualities could be forced to raise billions of pounds in capital to strengthen their finances.
The Prudential Regulation Authority, which is part of the Bank of England and responsible for making sure banks and insurers are financially stable, is preparing to release the details of its stress-test scenario in the coming weeks, having postponed the annual exercise because of the war in Ukraine.
The results from the UK’s largest banks – which include NatWest, Barclays, HSBC, Lloyds, Standard Chartered, the UK arm of Santander, Nationwide Building Society and Virgin Money UK – will be made public in summer 2023.
While the annual stress-test exercise usually features a severe economic downturn, this will be the first time that banks are forced to prove they can withstand the effects of an energy crisis. The central bank has previously tested lenders against
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