Seven big banks and Nationwide building society are to be stress tested to ensure they are strong enough to withstand sharp drops in house prices and sudden rises in interest rates.

They will be required to show they could survive a 35% fall in house prices, and interest rates jumping to 4% after five years at a record low of 0.5%.

The so-called stress tests are to be conducted by the Bank’s of England’s Prudential Regulation Authority.

The scenarios are not forecasts by the Bank but are intended to demonstrate that the institutions are being subjected to severe tests.

“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,” said a Treasury spokesman.

The tests come amid warnings of a “super bubble” in London, and the Office for National Statistics reporting that house price growth has picked up across most parts of the UK. For the UK as a whole, house prices were up 9.1% in February, the fastest annual growth for more than three and a half years.

According to Nationwide, house prices dropped 20% during the last financial crisis. The average price hit a high of £184,723 in September 2007 and bottomed out at £147,746 in February 2009.

The tests are expected to cover three years to 2016.

The US already conducts such tests and on Monday one of the country’s biggest banks, Bank of America, uncovered a banking error that dated back to 2007.

As a result, Bank of America, which bought Merrill Lynch when Lehman Brothers was collapsing in 2008, has been forced to suspend its plans to increase its dividend payout to shareholders.