Bank stress tests to be harsher, says FSA

The FSA wants to ensure that banks can survive another financial crisis

Further stress-testing of UK banks will take place to ensure they can survive a 'double-dip' recession, the Financial Services Authority (FSA) has said.

The regulator said new tests would assess banks' ability to survive another 2.3% fall in GDP between now and the end of 2011.

Further falls in property prices and 13% unemployment would also be assumed.

But the FSA added that stress test scenarios were intended to be much worse than was realistically expected.

Stress-testing was introduced following the financial crisis to ensure that banks were holding enough capital to allow them to continue operating through tough economic conditions.

Tests carried out in 2009 ensured that UK banks could withstand a peak-to-trough fall in GDP of 6.9%, a rise in unemployment to peak at 12.5%, and a total fall in residential property prices of 50%.

Do Britain's banks have enough capital to [survive] a second recession? Probably. Robert Peston, BBC business editor Peston: How much stress can the banks take?

Now the FSA says changes in the state of the economy mean banks need to guard against a total fall in GDP of 8.1%, leading to total unemployment of 13.3%.

The new stress-test scenario is more positive on house prices though, modelling a fall of 23%.

The FSA emphasised that it still expects the economy to continue to recover slowly, but that banks needed to be prepared for unexpected changes in the economy.

The BBC's business editor Robert Peston said that the UK's banks probably already had enough capital to withstand a second recession.

"The FSA insists [that banks] hold core tier one capital... equal to a minimum of 4%," he said.

"Right now the core tier one ratios of all our biggest banks is more than twice that. Most of them have ratios greater than 10%."