Many Happy Returns The 2025 Stress Test: The Banks Are Safe... Are You?
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Dec 10, 2025 The latest stress test reveals all major UK banks can withstand a nightmare scenario of soaring inflation and plummeting house prices. Despite potential chaos, banks might actually benefit from rising interest rates. The hosts explore personal risks, like job losses and the threat of negative equity, if house prices tumble. They suggest defensive assets like gold and cash for those wanting to weather the storm. Plus, they debate the implications of banks being too big while emphasizing the importance of safety in financial stability.
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Supply Shock Drives Stagflation Scenario
- The 2025 test models a global supply shock with huge commodity price rises and collapsing trade.
- That scenario drives inflation up and forces central banks to raise policy rates sharply.
Capital Buffers Keep Banks Solvent
- CET1 ratios are the banks' shock absorbers and fell in the test but stayed above solvency thresholds.
- The system-wide CET1 drop to around 11% shows resilience versus pre-crisis levels near 4–5%.
Higher Rates Can Rescue Bank Profitability
- Banks suffer loan losses but net interest income rises when policy rates jump, offsetting some damage.
- This scenario differs from the GFC because rising rates help bank profitability instead of hurting it.