FSA Stress Test on UK Banks Not All That Stressful

The Financial Services Authority (FSA) today revealed some details about its current batch of stress testing on UK banks.

Though it wouldn't reveal specific details about the two banks involved, Lloyds and RBS -- chosen because they want to make use of the government's asset protection scheme -- the FSA did say that it tested the banks based on a 50% drop in UK house prices, a 60% drop in commercial property values and a 6% peak-to-trough GDP contraction. House prices have already dropped 20-25% depending which index you go by.

Barclays recently said it too had been tested by the FSA and had passed.

The FSA said that the scenario was not meant to reflect real-life forecasts, but an absolute worst case scenario. It was the figures that the tests were based on that attracted the most criticism. Not that they were too harsh, but that they were too close to what is entirely possible of becoming a reality.

"As a stress test, this doesn't seem very stressful," said Alan Clarke UK economist at BNP Paribas, who believes that a 6% peak-to-trough fall in GDP is not worst-case scenario but the likely outcome of the recession.

Joseph Harwood of Gloucester investment property company Rock Star Investment Gloucestershire felt the same way about their house prices worst case scenario.

"We recently compared the average Gloucester house price, to the average gross salary of its residents from the Office of National Statistics, and found house prices to be 7.8 times the gross salary. It is a widely held theory that house prices will fall until they are 4.0 times or below the average gross salary, with that in mind we suggested that house prices could fall anywhere up to a further 40-50% in Gloucester," he said.

It is likely that a similar story could be told of many UK regions.

The tests were done to see whether banks could survive the worst recession in 60 years. We don't know whether they passed or failed, but we may soon get to find out in a real-world scenario that won't need Freedom of Information to reveal it.