FSA redesigns bank stress tests

by Gill Montia

Story link: FSA redesigns bank stress tests

In its 2010 Financial Risk Outlook report, the Financial Services Authority (FSA) has told UK banks they must retain core tier one capital ratios of at least 4%.

While acknowledging that the UK economy is expected to continue to recover, the regulator wants financial firms to be equipped for the possibility of a peak-to-trough fall in gross domestic product of -8.1% by 2014, accompanied by a rise in unemployment to over four million.

However, mortgage lenders have been asked to incorporate a 36% fall in house prices in their calculations, compared with the 50% peak-to-trough decline contained in the FSA’s 2009 Financial Risk Outlook.

Looking forward, the report states: “The capital planning of banks and building societies will need to reflect: the losses which have emerged over the last year and may re-emerge; appropriate stress tests in light of latest economic developments; and the future international capital regime which will emerge during 2010.”