FSA has greatly increased the use of stress tests as an integral element of ongoing supervisory approach and begun the process of embedding this revised approach in the intensive supervisory regime. More importantly, it used stress tests to inform policy decisions such as access to the Credit Guarantee Scheme (CGS) and the Asset Protection Scheme (APS) working closely with the other Tripartite authorities.
It states that its approach falls in the current UK regulatory framework that is similar to other countries and EU-wide stress testing exercise which is being co-ordinated by the Committee of European Banking Supervisors (CEBS). The FSA will be participating in this exercise and the EU wide scenarios will be agreed by the European Commission and CEBS. The exercise will be completed by September 2009.
FSA assumes that the current recession scenario in the UK is more severe and prolonged than those which it had suffered in 1980s. It predicts the GDP to decline over 6%, with growth not returning until 2011 and only returning to trend growth rate in 2012. It models the impact of unemployment rising to just over 12% and, crucially, the impact of a 50% peak-to-trough fall in house prices and a 60% peak-to-trough fall in commercial property prices.
The current framework will remain in place until the Basel accord, which is implemented through EU capital requirement directives, has been modified to reflect the lessons learned from recent events.
