Bank of England’s 2017 stress test of the UK banking system
28 November 2017
David Strachan, partner and EMEA head of the Centre for Regulatory Strategy at Deloitte, commented on The Bank of England’s 2017 stress test of the UK banking system:
“The results of the exploratory scenario demonstrate a significant reduction in return on equity against plans, but even then embed aggressive assumptions around cost reduction. Therefore taking cost to income ratios from 68% to 54%. Cost reduction is already on banks’ agendas and they would likely need to find structurally different approaches to achieve the projected savings.
“The results mention the quality of stress testing, and specifically the progress banks still need to make on models and data. Perhaps more important though is that stress testing processes in general remain laborious and distinct from day-to-day operations. Banks will not be able to embed the exercise in their regular operations until processes are improved.
“The FPC plans to reconsider the adequacy of a 1% countercyclical capital buffer rate in light of the evolution of the risk environment, included because of Brexit. I expect banks to be asked to perform sensitivity analysis around certain scenarios – for which banks could of course use their stress testing capabilities. Such scenarios are unlikely to be formally part of the 2018 scenario though.”
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