Details have emerged of an extraordinary ‘stress test’ created by the Bank of England and tested on eight major banks to see if they would survive a catastrophic tanking of the economy.

The scenario created by the BoE would have house prices falling by 31 per cent, the unemployment rate increasing to 8.5 per cent and inflation rising to 17 per cent.

The banks and lenders tested – Barclays, Lloyds, HSBC, NatWest, Santander UK, Standard Chartered, Nationwide Building Society and Virgin Money – all passed, according to the BoE’s latest Financial Stability Report, released this week. 

The report says: “We recently tested the major UK banks using a severe stress scenario that is much worse than the economic outlook we expect. The stress scenario included the unemployment rate increasing to 8.5 per cent, inflation rising to 17 per cent, and house prices falling by 31 per cent. 

“The results of this stress test showed that the UK banking system would continue to be resilient, and be able to support households and businesses, even if economic conditions turned out to be much worse than we expect.

“As borrowing costs have increased, the demand for loans has reduced. Banks do not appear to be cutting the availability of credit in a way that is out of line with changes in borrower creditworthiness.

“We set the Counter Cyclical Buffer rate each quarter. This provides banks with an additional ‘rainy day’ buffer making sure they can withstand potential losses without restricting lending to the wider economy. The UK CCyB rate has been maintained at 2.0 per cent.”

In its most recent six-monthly Financial Stability Report, the Bank admitted that raising base rate from 0.1 per cent in December 2021 to 5.0 per cent now, in an effort to bring down inflation, has inevitably meant higher monthly mortgage payments and other household costs.

The report says: “Higher interest payments on loans mean some borrowers may struggle with their repayments, which increases the risks faced by banks … [but] UK banks are resilient and are strong enough to support their customers.”

Sophie Lund-Yates, lead equity analyst at business consultancy Hargreaves Lansdown, says:  “The Bank of England’s latest stress test has shown the UK’s main lenders will be able to stomach worsening economic conditions. This includes the effects of weakening commercial real estate prices, recessions, higher rates and inflation. 

“The tests come as a relief during a time that’s been marred by anxiety about regional banking failures in the US as interest rates have shot up in many major economies. A combination of strong balance sheets, healthy asset-classes and a stricter regulatory environment mean the UK’s financial giants also have more room to help customers if things get tougher, including changing the terms of loans if needed. 

“The Bank of England also highlighted even smaller lenders are able to withstand a higher-rate environment. 

“Overall, there aren’t too many people falling behind on their mortgage payments, but it’s widely acknowledged that the full extent of higher rates is yet to trickle down – and the point at which this happens is likely to have consequences for the wider economy and companies.”