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Bank of England tweaks stress tests for virus fallout

Published on January 20, 2021

The Bank of England said Wednesday it is tweaking stress tests on the UK banking sector this year to include fallout from the coronavirus pandemic.

The BoE, which tests the ability of lenders’ balance sheets to withstand shocks, said its worst-case Covid-19 scenario would see the economy collapse by 37 percent from its pre-pandemic level in 2019 to the end of 2022.

“The aim of the 2021 solvency stress test differs from a standard stress test, which is to ensure that banks have built up buffers of capital, ready to be drawn on to support the economy in a stress,” a BoE statement said.

It did not specify when results would be published.

“The focus this year will be to inform judgements about the most appropriate ways in which the banking system can continue to support the economy through the ongoing stress.”

Britain’s economy had slumped into a historic downturn in the first half of last year on the back of the initial strict coronavirus lockdown.

Economists now warn that the current restrictions, imposed across much of the UK this month to curb a rampant Covid-19 variant that is deemed to be more transmissible, could spark a double dip recession.

“Once the economy enters a real stress, such as that driven by the Covid-19 outbreak, the focus changes,” noted the BoE on Wednesday.

“At this point stress tests are used to assess whether the buffers of capital that banks have built up are large enough to deal with how the prevailing stress could unfold.

“Following the Covid outbreak, the bank cancelled the 2020 concurrent stress test and instead undertook desktop analysis of the resilience of the UK banking sector to the unfolding stress,” it added.

Before the latest lockdown restrictions, the BoE had forecast in November that the UK economy would rebound by 7.25 percent in 2021, following a dramatic 11-percent slump in 2020. It has not yet updated its outlook.

The central bank added Wednesday that this year’s stress tests would seek to establish whether lenders are prepared for long-term changes in consumer behaviour sparked by cautious spending — particularly in the virus-ravaged aviation and hospitality sectors.

Britain has been the European nation worst hit by the devastating pandemic with a death toll of more than 93,000.

Prime Minister Boris Johnson’s Conservative government is pinning its hopes on a mass vaccination drive, which has already inoculated around 4.6 million people with their first dose.