The UK Financial Services Authority (FSA) is standing by its decision to not publish the results of the ‘stress-test’ it performed on UK banks. However, the FSA felt compelled to clarify the use of the tests. In a press release on May 28, 2009 it wrote:
The UK authorities have not applied stress testing in the same way as in the US – a single exercise covering simultaneously the top 19 banks which account for two thirds of the assets of the US banking system. Instead, over the last eight months since the intensification of the financial crisis, the Financial Services Authority (FSA) has:
- Greatly increased the use of stress tests as an integral element of our ongoing supervisory approach.
- Begun the process of embedding this revised approach in our intensive supervisory regime.
- sed stress tests to inform policy decisions such as access to the Credit Guarantee Scheme (CGS) and the Asset Protection Scheme (APS) working closely with the other Tripartite authorities.
The FSA writes:
The stress tests used are not forecasts of what is likely to happen but deliberately designed to be severe. Their purpose is to consider whether an institution would be able to sustain adequate capital and liquidity under conditions which at the time the stress is conducted are considered unlikely to arise. They therefore aid our determination of whether firms are able to comply with our regulatory framework.
Stress testing is necessarily forward looking and therefore involves an element of judgement. This is particularly true given that the most important challenge facing the banking system has changed over the last six months.
and goes on to provide some details:
The current stress scenario models a recession more severe and more prolonged than those which the UK suffered in the 1980s and 1990s and therefore more severe than any other since the Second World War. It assumes a peak-to-trough fall in GDP of over 6%, with growth not returning until 2011 and only returning to trend growth rate in 2012. It models the impact of unemployment rising to just over 12% and, crucially, the impact of a 50% peak-to-trough fall in house prices and a 60% peak-to-trough fall in commercial property prices.
The FSA further points out that its efforts were supposed to fit into the EU-wide stress testing exercise to be performed on the aggregate banking system the CEBS coordinates, which Ireported on in an earlier post:
The UK approach to stress tests is similar to that followed in most countries, other than the US, which have applied stress tests to inform decisions on specific institutions and as part of intensified supervisory processes, rather than as a one-off, system wide and publicly disclosed process. CEBS has, however, now committed to co-ordinating a Europe-wide stress testing exercise to inform assessments of the aggregate health of the banking system. This exercise will use common approaches and scenarios and aims to increase the level of aggregate information available to policy makers in assessing the European financial system’s resilience to shocks.
One might conclude from this, that the national authorities in the EU consider it a problem of the banks to ensure that they are sufficiently capitalized and it is only the system as a whole who they need to be concerned with. However, we note that unlike the EU-wide test, which is not going to assess the health of individual institutions, the FSA has done just that.
I am still wondering how the CEBS wants to meassure the health of the EU financial system without relying on stress-test results of individual institutions.