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Banks told to prepare for gloom

UK banks have been ordered by the Financial Services Authority (FSA) to prepare for a double dip recession, another crash in house prices and a sharp increase in unemployment.

The 2010 stress test targets set by the regulator are even more stringent than last year and have been heavily criticised by institutions already short of capital.

Banks must assume that in 2010 to 2014 economic growth will tumble 8.1 per cent from peak to trough, up from the 6.9 per cent target set last year, and that the unemployment rate will rise to 13.3 per cent from 7.8 per cent at present.

But their models for house prices must only take into account a 36 per cent fall from their peaks in August 2008, an improvement on the 50 per cent set by the FSA last year.

Lord Turner of Ecchinswell, the chairman of the FSA said: “We are not anticipating that [meeting the new requirements] requires a whole lot of extra capital. A lot of the banks will have a stronger starting point than they did when running the 2009 stress tests.”

But analysts disagreed.

“The worry is that the cumulative effect of all these reforms will be on the capacity of the banking sector,” added Simon Morris, a lawyer at CMS Cameron McKenna.

The FSA said it wants to make sure banks are strong enough to survive a further downturn in the economy.