The Bank of England has announced that ‘stress tests’ will be held on UK financial institutions to ensure they could survive housing market turmoil.

Eight of the country’s biggest banks and building societies will be required to show they are strong enough to withstand 35% drops in house prices and 5% rises in interest rates, after five years at a record low of 0.5%.

"The government created the new regulatory system in order to build a resilient economy and avoid repeating the mistakes of the past. Building strong and resilient banks is a core part of our long-term economic plan," the Treasury said.

The tests will be conducted by the Prudential Regulation Authority on seven banks – Royal Bank of Scotland, Lloyds, Barclays, HSBC, Standard Chartered, Co-operative and UK arm of Spain’s Santander – and one building society – Nationwide.

The tests are expected to cover three years to 2016, and the European Banking Authority, which is overseeing them, has allowed local regulators, such as Bank of England, to make their tests tougher.

This announcement happens as the EU’s banking regulator prepares to outline details of its co-ordinated program to make the financial system across the EU more resilient.

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