(Bloomberg) -- The Bank of England wants to know how the financial system would cope if Covid-19 results in a double-dip recession and societal adjustments that last for years.
The central bank released key elements of its 2021 bank stress tests Wednesday. Its will examine the effect of a 37% contraction in the economy between 2020 and 2022, impairment of the aircraft and travel sectors, more global protectionism and a future where consumers spend years working from home, avoiding restaurants and shopping online.
“Banks will be expected to stress the airline and airline leasing sector as well as identifying their most significant sectorial cohort of Covid-related exposure under the stress,” the central bank said. “The test also includes stressed revenue and costs projections for investment banking activities.”
The stress test also assumes “sustained weakness” in both residential property and valuations of commercial real estate, where the BOE noted “stretched valuations” for prime space. It will test for a stressed scenario where unemployment rises to 12% while commercial and residential property prices plunge by a third.
To be sure, the central bank has a positive stance on banks’ resilience for now. The BOE skipped a stress test for 2020 amid the Covid-19 outbreak, and, like other central banks around the world, told banks to halt their dividends to build up their capital reserves.
Bankers have lobbied vocally for a return to payouts, and the central bank offered them a path to normality last month, saying dividends will be capped at about 25% of quarterly profit, among other rules.
The stress test will apply to Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc, Nationwide Building Society, NatWest Group Plc, Banco Santander SA’s British arm, Standard Chartered Plc and Virgin Money UK Plc.
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