A key threshold measuring whether British banks can cope with a meltdown in global trade has been triggered, The Mail on Sunday can reveal.

The Bank of England has just launched its latest hypothetical stress test on Britain's seven biggest banks and building societies to see if they can withstand a scenario in which global tensions mount, leading to a trade war.

The worst-case scenario came true when on Friday a fear gauge known as the Vix soared after Donald Trump's sweeping tariffs sent stock markets reeling with the sell-off led by banks.

The infamous index – closely watched in the 2008 financial crisis (see chart) – shot up after China retaliated in full to the President's broadside by imposing matching levies on all imported US goods.

It hit 45 - the point at which Bank's stress tests kick in - having doubled since Trump's shock tariff announcement roiled investors

The Vix represents in real time traders' expectations of how volatile they think the US stock market will be over the next 30 days. It is now at its highest since the 2020 pandemic, having rocketed since Trump unleashed the harshest US tariffs in a century, sparking fears of a global recession.

Banks have borne the brunt of last week's brutal stock market sell-off. They have been clobbered because a slump in economic activity would cut demand for their loans, which oil the wheels of trade and commerce.

The three UK lenders to drop furthest were HSBC, Standard Chartered and Barclays.

Their shares dived 14 per cent, 17 per cent and 16 per cent respectively in just two days.

HSBC and Standard Chartered 'are significantly exposed to global trade flows' and operate in parts of Asia that have been hit hardest by tariff increases, said John Cronin, analyst at SeaPoint Insights, a banking consultancy. Barclays faces a sharp slowdown in fees from its investment banking arm as deals dry up.

The trio are also among 29 lenders identified by regulators as globally systemic banks that are in effect deemed to be 'too big to fail'.

It means they are required to hold more 'rainy day' money in reserve and are subject to greater scrutiny because of their potential impact on the global financial system if one or more of them failed.

The rules were introduced following the collapse of US bank Lehman Brothers almost 17 years ago.

The Bank of England have been stress-testing lenders since 2014 to ensure that they can weather 'a range of adverse shocks' and avoid a repeat of controversial taxpayer-funded bailouts made during the financial crisis. The latest stress test was launched last month and covers Britain's seven biggest banks and building societies, including Lloyds Banking Group, NatWest, Santander and Nationwide.

In the worst-case scenario where the Vix hits the 45 level, UK share prices fall by 48 per cent compared with a peak-to-trough collapse of 40 per cent seen in the financial crisis.

The benchmark FTSE All-Share index is down almost 12 per cent from its recent high.

Lenders are also being tested to see if their balance sheets can handle a scenario in which world trade slumps by a fifth, global output falls by 2 per cent, the UK economy shrinks by 5 per cent, unemployment doubles and inflation hits 10 per cent. Experts reckon the trade war sparked by what Trump calls his 'reciprocal' tariffs will knock UK economic growth enough to wipe out Rachel Reeves's thin headroom of £9.9 billion to meet her 'non-negotiable' fiscal rules.

That would leave the Chancellor with little option but to raise taxes again later this year.

The UK has so far avoided retaliating and Ministers remain hopeful of securing a transatlantic trade pact after a minimum 10 per cent tax was slapped on British goods entering the US.

Analysts say they do not expect central banks to step in with immediate emergency interest rate cuts to calm financial markets, as they did during the Covid crisis in 2020. This would be 'premature', said SeaPoint's Cronin.

What central banks are expected to do is accelerate the current pace of base rate reductions. But the Bank of England's rate-setting Monetary Policy Committee is not due to meet until next month, when benchmark borrowing costs are expected to be lowered from 4.5 per cent.

Three further rate cuts are now on the cards by the end of the year, meaning lower mortgage bills for millions of homeowners.

In the meantime all eyes are on Trump's next move.

The President is expected to sign lots of bilateral trade deals in the coming months, with tariffs lowered for countries that offer the US concessions on trade, industrial policy and security.

Those who resist will pay higher costs until they decide to come to the table.

The results of the latest stress test will be known later this year.

The Bank of England declined to comment but is understood to be monitoring developments.