The Stress Test That Lost Its Bite: Key Takeaways from the 2025 Bank Capital Stress Test

Introduction

On 2^nd December 2025, the Bank of England (BoE) published the results of the 2025 Bank Capital Stress Test (BCST), the first under the new Stress Testing framework. Our previous blog summarises the key changes to the stress testing approach, as well as the opportunities and challenges the new regime presents to banks.

Although the aggregate Core Equity Tier (CET) 1 capital drawdown was identical to the 2022/23 exercise, the overall results were particularly relevant for firms both in and out of scope of the BCST, in terms of their implications for future stress tests. Our main takeaways from the publication of this year’s results are below:

• The BoE has effectively locked in a milder stress testing regime going forwards. Changes to the scenario and key judgements made by the FPC have essentially lowered the pass-mark for firms, and will set the precedent for future BCST exercises.
• This results in substantial additional capital headroom for firms, meaning the BCST is no longer binding in terms of being used by the FPC to increase capital requirements, and will instead be used as a regulatory “back-stop”. This is consistent with the FPC assessment that the benchmark for system-wide Tier 1 capital requirements, previously judged to be around 14% of risk-weighted assets (RWAs), is now around 13% of RWAs (equivalent to a CET1 ratio of around 11%).
• However, banks are by no means “off the hook” given the changes. Instead, they imply a pivot away from regulatory stress testing, with the regulatory focus shifting toward banks' agile internal stress testing capabilities and emerging risks in the private market and Non-Bank Financial Intermediary (NBFI) sectors. We have observed specific feedback from the PRA for firms in this area, which will therefore require investment in internal stress testing capabilities to capture broader risks e.g. (AI, geopolitical, and climate). This investment will transform stress testing from a compliance exercise into a core driver of Board-level decision-making and strategy.

Summary of overall results

As expected, all banks remained above their set capital minima at the low-point of the scenario. No individual bank was required to strengthen its capital position as a result of the test.

However, some key changes were made to aspects of the scenario in the context of the new stress testing framework and the ending of transitional relief under IFRS 9, which would have led to earlier recognition of credit losses in a stress and an unwarranted increase in capital requirements, all other things equal.

These changes translated to an aggregate CET1 capital drawdown of 3.5 pp at the low-point, which was identical to the 2022/23 exercise, but significantly lower than the 5.2pp drawdown in the 2019 Annual Cyclical Scenario (ACS). The most material changes are summarised below:

Overall, the combined changes effectively lowered the severity of the exercise. In addition, this year’s test was judged against the lower standard of minimum requirements (6.2% of CET1) instead of aggregate hurdle rates (which included some systemic buffers and reached 6.9% of CET1 in the 2022/23 ACS).  The combined impacts of these changes imply much  more capital headroom (4.8% of CET1) than in previous stress tests (3.8% in 2022/23), even after accounting for the end of IFRS 9 transitional relief.

These changes in approach mean that major UK banks now have additional capacity to continue lending to the real economy, even in a severe scenario. This increased headroom supports lower capital requirements, aligning with the FPC’s separate announcement that the optimal level of Tier 1 capital has been reduced from 14% of RWAs to 13%.

Implications for firms

The publication of these results signals an important shift in the stress testing landscape, with distinct implications for firms both in and out of scope of the BCST.

Focus shifts to agile internal stress testing

The BCST has effectively evolved from a "binding" constraint, used actively to calibrate capital requirements and drive improvements in balance sheets, to a regulatory "back-stop" designed to protect against sharp balance sheet deterioration. 

Given this, we now anticipate a sharper focus from the BoE and PRA on banks' internal stress testing capabilities. Therefore, it is essential for banks to invest in their internal stress testing to be more agile, for example by considering a wider range of scenarios such as import tariffs, AI financing risks, geopolitical events and climate, and to be more adaptable. The PRA’s 2025 priorities letter underscores the importance for banks’ senior management and Boards of leveraging stress and scenario analyses to inform risk management, strategy and business planning.  

Private Market Exposures and the SWES

The BoE has signalled a clear intent to scrutinise emerging risks in private equity/credit and the NBFI sectors. Firms should prepare for this widened scope, particularly given the announcement of the upcoming System-wide Exploratory Scenario (SWES) to explore private market risks in greater depth.

This is also evidenced by the BoE’s announcement on its plans for a novel assessment of the private credit market and the systemic risk its lending poses to the UK economy, after securing the voluntary co-operation of enough big US private capital groups such as Blackstone, Apollo, KKR, Oaktree and Goldman Sachs Asset Management.

Climate-related financial risks

On 3rd December 2025, the PRA also published Supervisory Statement 4/25, on its expectations for firms’ approaches to managing climate-related risks, replacing SS3/19 in its entirety. The Bank has stated that the materiality of the UK banking industry’s exposures to climate-vulnerable counterparties underscores the need for such risks to be incorporated into banks’ risk assessments and management capabilities. In particular, the statement advises firms to utilise reverse stress testing as a vital component of this toolkit, allowing them to identify the specific climate scenarios that would render their business models unviable. Climate scenario analysis sits at the heart of the SS 4/25, so firms should ensure they are considering the appropriate range of climate risk scenarios and have the right tools/models to map those scenarios into impacts.

Benchmarking for Non-BCST Firms

Banks not in scope of the BCST should consider how to use the BCST scenarios as a benchmark for their internal stress tests, and whether the changes to the scenarios might have any implications for them, particularly in the areas of Consumer Credit, the timing of credit loss recognition under IFRS 9 and the impact of much higher Base Rates on credit losses and net interest income.