FSA toughens stress test for banks

Date: Wednesday 10 Mar 2010

Banks and building societies has been told by the UK regulator to test their businesses for two more years of recession and a much sharper decline in the UK’s economy than in previous tests.

Even though the UK economy officially moved out of recession at the end of 2009, the FSA is testing to see if the financial system could cope with a further 2.4% fall in GDP between now and the end of 2011.

The FSA asked the banks and building societies to assume a 23% fall in house prices from present levels, a 34% drop in commercial property values and a rise in the unemployment rate from the present 7.8% to 13.3%. That would imply 4.2m people out of work.

The FSA emphasised that its central expectation was for the economy to continue its slow recovery but that it needed to ensure banks would be resilient enough in more adverse conditions that were unlikely but possible.

The UK's recovery from the financial crisis was only gradual and that vulnerabilities remained, it added.

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