‘Stress tests see how banks would cope with worst recession since WW2’

July 3, 2009 at 1:12 pm

The FSA (Financial Services Authority) has carried out a series of stress tests on UK banks in a bid to see how they would cope if the economic situation continued to deteriorate. To do this, the FSA assumed the conditions of a recession that was the worst since World War II. Part of the reason behind the testing of the banks was to measure how well they would be able to withstand severe losses in the near future.

Many of the big names were tested, including Royal Bank of Scotland, Lloyds and Barclays, and a few of the harsh hypothetical conditions that they were tested on included:

  • an unemployment rate of 12%
  • a 50% drop in house prices
  • a 6% drop in gross domestic product
  • a 60% decline in commercial property prices

The FSA based the tests on hypothetical five-year models, but it wanted to make clear that these were not actual forecasts of where it saw the economy heading, but rather just a selection of worst-case scenarios to see how far the banks could handle the conditions. However, some economists have said that the conditions were actually quite similar to what could become the reality in the near future.

There has been a certain degree of secrecy surrounding the results of the tests, and the only bank to reveal its results so far has been Barclays. The FSA has stated that it will not release the results of any individual bank because the results will be used to determine their decisions surrounding future regulation. This has frustrated a lot of people working in the financial sector who want more details of how individual banks performed.

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