UK

Banks to be put through minibudget-style shock tests

The Bank of England will put banks and others through a test (Aaron Chown/PA)
The Bank of England will put banks and others through a test (Aaron Chown/PA) The Bank of England will put banks and others through a test (Aaron Chown/PA)

Some of the UK’s largest banks, insurance companies and pension funds are being put through their paces by the Bank of England to see how well they could cope with a repeat of the market chaos during Liz Truss’s premiership.

The Bank said that it had handed more than 50 firms a set of scenarios which it wants them to wargame.

It is intended to replicate some of the chaos and more which was unleashed on markets last autumn after Liz Truss and Kwasi Kwarteng revealed their budget and other moments of turmoil.

The institutions – which also include hedge funds, insurers and asset managers – will be asked to say how they would respond to a series of simulated shocks to the economy.

Kwasi Kwarteng resignation
Kwasi Kwarteng resignation The tests will simulate market chaos seen under former prime minister Liz Truss (Daniel Leal/PA)

The scenario includes big swings over ten days in the amount that it costs the Government to borrow, a sharp increase in company borrowing costs as seen in March 2020, and a change in global yields comparable to anything seen this century.

It was designed to be a short, sharp shock, rather than a longer-term recession like some of the Bank’s other stress tests.

The Bank said that this is a “severe, but plausible” stress test of the participants. It is working with the Financial Conduct Authority and The Pensions Regulator and is in contact with authorities abroad.

It wants to find out how institutions would react and what impact their reactions might have on the market.

The participants will submit their responses in January, they will be handed a second round based on those responses in the second quarter of next year.

The Bank will publish a report by the end of next year, but it will not publish any information on individual firms.