The Bank of England said on Wednesday the aim of its banking stress test this year is to check if banks can continue helping the economy during the pandemic and if a return to more normal levels of dividends is possible.
The British central bank cancelled its annual health check of banks last year so they could focus on keeping credit flowing to an economy hit by its worst downturn in 300 years due to COVID-19 lockdowns.
Stress tests focus on the ability of banks to face major theoretical shocks, but the focus now changes given the economy has entered a real stress with COVID-19, the BoE said.
“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,” the BoE said in a statement.
The BoE said this year’s test of leading banks will be conducted in a “staggered” way, with banks submitting their initial projections in April on coping with a range of market shocks without going below minimum capital levels.
The BoE will then analyse the data and publish aggregate results in the summer, with the usual bank-by-bank outcomes made public in the fourth quarter.
After the economy went into its first lockdown in March last year, the BoE told banks to suspend dividend payments to preserve capital. In December, the central bank set out “guardrails” for relaxing its curbs on bank dividends.
“As noted in the December 2020 Financial Stability Report, the results of the 2021 test will also be used as an input into the Prudential Regulation Authority’s transition back to its standard approach to capital-setting and shareholder distributions through 2021.”
To help banks with the different timetable this year, the BoE said their “ring fenced” retail banking units would not form part of the test.