FSA reveals stress model

THE stress tests used by the Financial Services Authority (FSA) to determine the health of UK banks envisaged a grim scenario in which unemployment hits 3.7m, house prices are cut by half and the recession continues for another 18 months.

The City watchdog used the nightmare scenario to judge how a deep and lengthy recession would impact on the financial strength of banks.

But while the US has made public the results of its own stress tests, the FSA said it would not follow suit.

The central assumption in the testing procedure, the FSA said, was that the economy would contract by 6 per cent, with no growth until 2011, representing the worst UK recession since the Second Word War.

Unemployment figures were fixed at a maximum of 3.7m, or 12 per cent, outstripping the total seen in the recessions of the early 1980s and 1990s.

The tests also assumed a house price fall of 50 per cent and a commercial property price fall of 60 per cent, much worse than has been seen so far.

The regulator said the procedure was not a one-off exercise as seen in the US, but said it was “embedding this revised approach in our intensive supervisory regime”.