Prepare for more worry and work in the lending sector as the regulator piles on the pressure with regard to stress testing in the wake of the banking crisis, says Philip Tebbatt
Sometimes what I do involves stress. This is not ideal if, like me, you are a bit of a worrier. But I am not seeking your sympathy – one makes one’s bed and all that.
But modern life does seem increasingly stressful. And to counteract all this increased tension – and I’m guessing that at this point purveyors of new age hokum would cite ying and yang who, I understand, are not the only breeding pandas in captivity – we are constantly bombarded with ways of de-stressing and generally hanging loose.
You only have to open the Sunday supplement of a national newspaper to be bombarded with details of the latest relaxation fad, particularly at this time of year.
Sometimes, as in the case of being told to “chill out” by one’s teenage daughter, being urged to relax can have the opposite effect. And yes, that one really makes the veins at my temples pulse in an unhealthy way.
And a glimpse at the Financial Services Authority’s latest Handbook Development Newsletter suggests that we will have to spend a bit more time stressed out – I mean, anyone would think there had been a banking crisis. (Are we using the past tense yet?)
The aforementioned newsletter contains a useful summary of some of the FSA’s latest consultations based on issues raised by recent difficulties. And there’s not much mistaking the common themes that run through them.
First, we have CP09/30 which looks at capital buffers. These are not, dear reader, at the end of the platform at Waterloo. Capital planning buffers, otherwise known as CPBs, are the amount of capital reserves firms should hold to both absorb losses and meet higher capital requirements.
It seems that banks and building societies in particular face changes designed to break the link between the basic FSA’s capital adequacy rules and the wider issue of CPBs required to respond to external factors of the kind with which we are all now familiar.
Closely linked to this is CP09/29 which focusses on the narrower issue of capital adequacy requirements, particularly in regard to firms caught by the European Union’s Capital Requirements Directive, with the emphasis on “strengthening the overall financial soundness of credit institutions”.
And on top of all of this we have PS09/20 specifically relating to stress testing in circumstances where the FSA states that “deficient stress testing was identified as one of the failures which contributed to the current financial crisis”.
Firms are called upon to improve their stress testing infrastructure. And in addition to companies’ inhouse testing programmes it is intended that the regulator should run its own stress programmes with firms to test them.
It is clear that the senior management teams in firms will have to think carefully about their stress management strategies in the weeks and months ahead.
And, of course, an FSA publication would not be complete without mention of remuneration, especially these days.
The newsletter provides a summary of developments that will shape its policies in this area following the proposal, floated in CP09/10, for a code of practice on remuneration. With all this stress floating about I feel like booking a holiday. And before I am deluged with emails, if I book a holiday it will not be because I have received a thumping bonus. What do you think I am? A merchant banker? Don’t answer that.
Philip Tebbatt is principal of niche financial services law firm Slater-Rhodes and can be contacted at philip.tebbatt @slater-rhodes.com