FSA calls for tougher stress tests
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Lenders will have to undergo more stringent stress tests to prove to the Financial Services Authority they have enough capital to withstand a more prolonged downturn.
The regulator published its Financial Risk Outlook yesterday that outlined what risks and issues the industry is up against.
It revealed the details of updated stress test models that banks and building societies will have to account for when working out how much capital they need to continue operating.
The report from the FSA says: “In 2009, the macroeconomic scenario used as an input for this supervisory stress testing took the economic position of the beginning of 2009 as its starting point, and projected forward for five years until the end of 2013.
“Given the changes in economic performance and prospects since early 2009, it is now appropriate to define a new scenario for 2010 to 2014.
“We will continue to keep the appropriateness of the macroeconomic scenario under review.”
The latest stress test model from the FSA tests for a further decline in gross domestic product of 2.3% from the end of 2009 to the end of 2011, a fall in the UK’s growth of 8.1% peak-to-trough.
It factors in a double-dip in house prices, with house prices falling by 23% from current levels, or a 36% drop from the market’s peak.
The 2009 stress test model tested a 50% peak-to-trough fall in house prices.
The latest scenario also includes a rise in unemployment to a peak of 13.3% in 2012, from a peak of 12.5% unemployment that was tested in last year’s model.
