Bank stress tests less severe than feared, says City
Worst-case assumptions made by the FSA 'are no worse than many analysts' forecasts'
- guardian.co.uk, Thursday 28 May 2009 17.09 BST
Stress tests used by the Financial Services Authority to decide whether banks are robust enough to withstand the worst recession since the second world war are less severe than the City had expected.
Analysts said the admission by the regulator that it had demanded banks had enough capital to absorb a rise in unemployment to 12% or some 3.7 million people, a halving of house prices and a fall in commercial property prices of 60% was not as bad as some were predicting.
The FSA stress tests had modelled a recession more "severe and more prolonged" than those in the 1980s and 1990s and assumed a peak-to-trough fall in GDP of over 6% with growth not returning until 2011. "The stress tests used are not forecasts of what is likely to happen, but deliberately designed to be severe," the FSA said.
Although the FSA's statement hit bank shares, Alan Clarke, UK economist at BNP Paribas, said that rather than a worst-case scenario, a peak-to-trough decline in GDP of 6% was now his central forecast. "As a stress test, this doesn't seem very stressful," he said. Since the onset of recession last year, there has already been a fall of more than 4% in economic output.
The FSA's assumption of a 50% drop in average house prices from their peak is closer to the worst-case predictions in the range of City forecasts. The gloomiest analysts in the Treasury's latest survey of independent experts were expecting a 20% fall this year, and another 10% next year. So far, prices are down by around 20% from the top of the property market.
Banks analysts at Credit Suisse agreed that the tests were "slightly less severe than expected".
The FSA has looked at banks' capital over five years, "but with greater detail over the first three". It wants to identify if there is a danger that their core Tier One capital ratios – used a measure of financial strength – would fall below 4%.
The test has been applied over the past four months and was used to evaluate the strength of the banks involved in the government's toxic assets insurance scheme. Lloyds Banking Group and Royal Bank of Scotland are insuring a combined £585bn of assets through the so-called asset protection scheme (APS) while Barclays was deemed to have passed its stress test and avoided entry into the APS.
The test – which the FSA acknowledged would have to change over time – has also been applied to building societies and was the basis upon which it raised concerns about the collapsed Dunfermline building society.
But it has refused, in light of a Freedom of Information Act request, to publish the result of tests on individual banks as the US authorities did.
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