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UK banks must be able to withstand 35% house price fall

The U.K.'s eight biggest lenders will have to prove they can survive a 35 percent fall in house prices.

New stress tests, which will be carried out next year, also include a rise to 4 percent in the Bank of England's base interest rate and the worst economic downturn in the U.K. for nearly a century. Bank of England officials stressed that they were not viewing this as a likely scenario.

Read MoreUK housing boom spreads out of the capital

Chris Ratcliffe | Bloomberg | Getty Images

The Bank is carrying out its own stress tests, alongside broader European stress tests, to address U.K.-specific issues like the amount of U.K. homeowners with variable rate mortgages, who are more vulnerable to interest rate rises.

Read MoreRoyal family, Bank of England warn of housing 'shock'

The U.K.'s 7 biggest banks, and building society Nationwide, will have to prove that they could keep a level of 4.5 percent of risk-weighted assets (RWAs) against common equity Tier 1 capital in the event of the scenario. This means they will have to make sure that the amount of risk on their balance sheets is backed up with sufficient capital. It compares to a core capital ratio of above 5.5 percent at the European level.

Mark Carney, governor of the Bank of England, said: "The challenge now is to put the UK banking system on a sounder footing."

Four U.K. banks have to pass European tests too.

Read More'Unsustainable' boom in UK property to cool by 2016

The stress tests have caused concern in the markets, as there are worries that if some banks need to raise more capital by issuing shares or selling assets, this could devalue their shares.

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