Britain’s financial regulator said the tests it uses to gauge banks’ capital strength assume house prices will halve and GDP shrink 6 percent in the current recession, making it the country’s worst for more than 60 years.
Myles Neligan, Interactive Investor
Publishing details of its “stress tests” for the first time, the Financial Services Authority said they assumed unemployment peaking at 12 percent, and no growth in the economy until 2011.
The tests also factor in a 60 percent peak-to-trough slump in commercial property values, outstripping the assumed 50 percent drop in residential prices.
“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 since the Second World War,” the FSA said in a statement on Thursday.
Credit Suisse banks analyst Jonathan Pierce said the FSA’s assumptions were less gloomy than predicted.
“On balance, this might be seen as slightly less severe than expected,” he wrote in a note.
“In fairness, the stress test was developed four months ago when economic forecasts weren’t quite so bad and a 6 percent GDP move and 12 percent unemployment was likely deemed a low-probability event.”
