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UK regulators reveal method used in bank tests

Britain's financial services regulator revealed Thursday some of the parameters it used in the recent stress tests of British banks, adding that it has greatly increased the use of such tests in recent months but — unlike the U.S. Federal Reserve — declined to reveal the results.
/ Source: The Associated Press

Britain's financial services regulator revealed Thursday some of the parameters it used in the recent stress tests of British banks, adding that it has greatly increased the use of such tests in recent months but — unlike the U.S. Federal Reserve — declined to reveal the results.

The Financial Services Authority said the tests — which are used to estimate the health of banks in case of a sharper economic downturn — employ a model that assumes a fall in overall GDP of more than 6 percent.

It also assumes Britain's recession to last until 2011, unemployment to hit 12 percent, as well as a 50 percent peak-to-trough fall in house prices and a 60 percent fall in commercial property prices.

That is a recession more severe and prolonged than any since World War II, but the FSA said that the scenarios are not forecasts of what will happen, but were "deliberately designed to be severe."

The Fed earlier this month went one step further and published the results of its tests on 19 major U.S. banks, which found that 10 of them needed to raise $75 billion more to withstand the losses that would come with a deeper recession.

British banks tested included the Royal Bank of Scotland and Lloyds Banking Group, which have applied to dump toxic assets in the government's taxpayer-backed insurance program.

The FSA said it had decided not to publish the results because the tests are now a firm part of its day-to-day supervision of the sector.

"Given that the application of the tests has and will continue to evolve, the precise parameters used have changed and will change over time," it said.

It said in January that it expected British banks to maintain Core Tier 1 capital — a key measure of capital strength — of at least 4 percent of risk-weighted assets after applying an FSA-defined stress test.

Building societies applying to use the government's credit guarantee scheme announced last October were also required to maintain a tier one ratio of 7 percent following the exercise.

The FSA said that the crucial issue was to identify future potential loan losses even among loans which currently would not be considered impaired on an accounting basis.

The regulator is also taking part in a Europe-wide stress-testing exercise of banks which will be completed by September.

In the United States, the Federal Reserve's report card earlier this month found the banking system viable but still vulnerable. Nine banks were stable enough that they needed no additional capital, it said.