The Bank of England has written to scores of heads of smaller lenders warning them that their tests for economic shocks should be “significantly” improved.   

The Prudential Regulation Authority completed an 18-month review of around 70 banks and building societies and found that a number had not properly prepared for shocks that could topple their firms.   

These unnamed businesses are considered non-systemic institutions, meaning their failure would not threaten the financial health of the UK.   

By contrast, systemic lenders, such as NatWest, Barclays, HSBC, Lloyds, the UK arm of Santander, Nationwide and Virgin Money are stress tested every year.    

However, the PRA’s director UK deposit takers Laura Wallis wrote to these smaller firms voicing the watchdog’s concerns.   

She writes: “Our review found that although many firms understand the basics of recovery planning, there are significant areas for improvement, most notably related to the development of recovery scenarios and the calculation of recovery capacity.”   

Wallis points out that “a number of firms did not use scenarios of sufficient severity, which will limit the effectiveness and value of the testing”.   

The director adds: “Our review found that firms are not calculating their recovery capacity effectively, nor are they adequately showcasing it in an understandable and usable way.    

“This reduces the accuracy and reliability of the recovery capacity calculations.”   

The country’s financial stability watchdog says it will talk to firms and trade associations about its concerns throughout the second half of this year.   

It will also now include sessions on stress testing at its June CEO conference.   

The body warns that smaller lenders must meet its “rules and expectations” on “solvent exit planning” by October 2025.