By Huw Jones
LONDON (Reuters) - The Bank of England said it would shorten its annual bank stress-testing cycle to give the sector more time to reflect and implement necessary changes such as boosting capital.
The BoE has conducted regular stress tests of top lenders such as HSBC, Barclays (LON:BARC), Lloyds (LON:LLOY) and RBS (LON:RBS) since 2014, the aftermath of a global financial crisis that forced Britain to bail out undercapitalised banks.
In a report, the central bank's Independent Evaluation Office (IEO) recommended giving banks more downtime between assessment cycles to reflect upon and implement changes.
"The Bank will compress the stress-testing timetable," the BOE said on Wednesday in response to the report.
Having sought the views of lenders, the BoE said it will lay out a new target timetable for the tests and set up an annual forum with banks to discuss how the process could be improved and share best practice.
Testing typically begins in the first or second quarter of the year with results published in November or December, giving banks little breathing room before the next cycle.
"There is further to go to deliver the stress tests more effectively, as evidenced, for example, by the lack of downtime to reflect on lessons learned and make improvements," the IEO said.
The IEO said the Bank could also be more responsive in testing for emerging risks, rather than just more predictable shocks like a slump in house prices or meltdown in stock markets.
The BoE said it would look at this.
The IEO added there was good evidence that testing was helping regulators set appropriate capital requirements, a core objective, but the tests could be finessed to include different degrees of, for example, property price falls or interest rate rises.
To ensure that banks carry out stress testing correctly, the BoE said it would also review how the testing framework used by each lender measures up against international norms. It was "minded" to publish some of the findings alongside the results of the main stress test.