Abstract/Summary

This paper captures a qualitative review of the regulatory prescribed stress tests for UK financial services designed by the Bank of England and the Prudential Regulation Authority (PRA)/Financial Conduct Authority (FCA) after the Global Financial Crisis. It presents a critical analysis of the use of stress testing as part of supervisory practices for UK banking institutions and insurance undertakings, commenting on their qualitative characteristics, after looking at the regulatory prescribed stress tests from three key categories: the macroeconomic scenarios for banks, denoted as the bank stress tests (BST), the insurance stress tests (IST), and the biennial exploratory scenarios (BES). In this study, five trends describing regulatory prescribed stress are identified: (1) the regulatory collaboration, (2) cross-industry stress tests, (3) exploratory scenarios, (4) reporting and disclosure requirements, and (5) the underlying modelling capabilities and tools. The associated challenges of (A) governance, (B) frequency, (C) individual disclosures, (D) data and modelling, and (E) capabilities and skillset from participating institutions underpinning these stresses are highlighted, shaping the policy recommendations for future exercises. These address the gaps identified from existing stress tests towards the effective prudential supervision of UK financial services, based on each scenario category, for improvements and advances to practices.