Bank stress tests to probe plunge in foreign investment

UK banks will have to show they can withstand a drop-off in foreign investment under an expanded annual stress test in the wake of the Brexit vote.

The Bank of England published the scenarios the sector will face - aimed at testing each lender's resilience to potential shocks.

The tests - failed by RBS (LSE: RBS.L - news) last year - are essentially aimed at ensuring banks have the money and systems in place to handle sudden headwinds.

The regime is based on the current level of risks, as outlined by the Bank's Financial Policy Committee, which has warned financial stability could be compromised as businesses start to adapt to Brexit conditions.

There will be two major tests, for the first time.

The annual test will probe the impact of a potential drop-off in global investor sentiment after sterling collapsed and bond yields soared in the wake of the referendum.

The Bank said: "As highlighted in recent financial stability reports, the United Kingdom's large current account (trade) deficit creates a vulnerability to a reduction in foreign investor appetite for UK assets and increases in funding costs for real-economy borrowers.

"The 2017 cyclical scenario incorporates a sudden increase in the rate of return investors demand for holding sterling assets and an associated fall in sterling."

The second test was being implemented to check whether lenders could withstand pressures of ultra-low interest rates - currently hitting profitability - on one end of the scale.

The other end would see rates rising towards 4%, with house price values plunging by a third amid a global economic meltdown.

That would also take in the potential impact of competition on the larger banks from smaller rivals, the Bank said.