FSA tells banks to prepare for double-dip recession

FSA tells banks to prepare for double-dip recession

Banks are being forced to prepare for a severe double-dip recession, including a jump in the unemployment rate to 13.3%, the City regulator said yesterday.

The regulatory ‘stress tests’ being imposed on the banks include a worst-case scenario that the UK economy contracts by a further 2.3%, the Financial Services Authority said in its annual ‘Financial Risk Outlook’ report.

In such a situation bad loans would inevitably increase, putting further pressure on banks' capital positions. The FSA is insisting that in such a scenario banks would still be able to keep their ‘tier one capital ratio’ - a vital measure of financial strength - at a minimum of 4%.

The FSA insisted the new stress tests would not require banks to hold significant amounts of extra capital, and that this was only a worst-case scenario, rather than a likelihood. However, the scenario implied in the latest round of tests are significantly worse than last year's equivalent tests, when the FSA asked banks to prepare for the possibility of a 6.9% peak-to-trough fall in GDP and a rise in unemployment to 12.5%.

In a seperate move, meanwhile, City minister Lord Myners is proposing that banks be forced to declare how many of their employees earn in excess of £500,000.

Such disclosure requirements would be much tougher than those suggested by Sir David Walker in his report on bank governance late last year. In that report, dismissed as too lenient by many critics, Walker suggested that banks only be forced to pubicly register employees earning more than £1 million, and even then their anonymity would be maintained.

Some estimates suggest that lowering the disclosure threshold to £500,000 would catch up to 25,000 City workers. The British Bankers' Assocation reacted angrily to the news, arguing that banker-bashing had become a 'popular political sport'.

source: citywire.co.uk