FSA reveals stress model

THE stress tests used by the Financial Services Authority (FSA) to determine the health of UK banks envisaged a grim scenario in which unemployment hits 3.7m, house prices are cut by half and the recession continues for another 18 months.<br /><br />The City watchdog used the nightmare scenario to judge how a deep and lengthy recession would impact on the financial strength of banks.<br /><br />But while the US has made public the results of its own stress tests, the FSA said it would not follow suit.<br /><br />The central assumption in the testing procedure, the FSA said, was that the economy would contract by 6 per cent, with no growth until 2011, representing the worst UK recession since the Second Word War.<br /><br />Unemployment figures were fixed at a maximum of 3.7m, or 12 per cent, outstripping the total seen in the recessions of the early 1980s and 1990s.<br /><br />The tests also assumed a house price fall of 50 per cent and a commercial property price fall of 60 per cent, much worse than has been seen so far.<br /><br />The regulator said the procedure was not a one-off exercise as seen in the US, but said it was &ldquo;embedding this revised approach in our intensive supervisory regime&rdquo;.