Jurisdiction(s):
United Kingdom

Key definition

Stress testing definition

What does Stress testing mean? Stress testing is the forward-looking assessment of how a bank’s capital and liquidity would withstand severe but plausible adverse scenarios, used in prudential regulation. It operates at both firm level (internal stress tests) and system-wide (regulator-led exercises), covering credit, market and liquidity risks. In the UK, the Bank of England—through the Prudential Regulation Authority (PRA) and the Financial Policy Committee—runs system-wide stress tests (including the annual cyclical scenario). Firms must also perform internal stress testing under the PRA Rulebook and the UK Capital Requirements Regulation/Directive, typically within ICAAP/ILAAP and the Supervisory Review and Evaluation Process (SREP). In Ireland, the Central Bank...

UK climate risk prudential supervision: Bank of England CBES scenario analysis, PRA Climate Change Adaptation Report and regulatory capital implications for banks and insurers

Published by a LexisNexis Financial Services expert

Practice notes

ARCHIVED :

This PRActice Note is archived and not updated. It introduces the Bank of England (BoE)’s Climate Biennial Exploratory Scenario (CBES), launched in June 2021, and reviews its design, objectives, scenarios included, and priority themes. It also references the Prudential Regulation Authority (PRA)’s Climate Change Adaptation Report 2021, issued in October 2021, and BoE’s publication on climate-related risks and regulatory capital frameworks, March 2023.

Background and introduction

The BoE has observed that climate change creates financial risks without precedent, meaning the development of tools to manage and reduce them is similarly novel. Scenario analysis and climate Stress testing are central to that toolkit, enabling examination of system-wide impacts and exposures across a variety of plausible climate pathways. Consequently, the BoE chose to deploy its stress testing framework to evaluate how climate-related risks could affect the UK financial system. In June 2021, the BoE released a key elements paper setting out its 2021 Biennial Exploratory Scenario on financial risks arising from climate change (the CBES) for the largest UK banks The exercise explores impacts and exposures across the financial system under multiple potential climate pathways, with structure, purpose, scenarios and areas of focus set out in the key elements document therein...

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Web page updated on 22/05/2026

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