FSA says UK bank tests will be tougher than in Europe

City A.M. Reporter
A pan-EU health check of banks currently underway will be useful and more consistent than last year's flawed exercise but Britain's own stress-test is tougher, Financial Services Authority Chairman Adair Turner said.

"I suspect you will find that our parameters will be tougher and tighter than the European ones. They were last year," Turner told reporters during a briefing on the watchdog's prudential risk outlook report.

The European Banking Authority is due to publish on Friday the economic shock scenario that some 88 banks across the European Union will have to test to see if they end up with enough minimum capital.

"We think the European stress test will be a useful exercise," Turner said. This will be because of a greater "commonality" and less variability among countries than last year.

The results of the EU test will be published in June but the UK won't publish the results of its own stress test.

Turner said that since November 2008, all UK banks have passed the FSA's rolling programme of stress tests.

Turner said the biggest banks will face a capital surcharge above the new Basel III global bank capital requirements that come into effect from 2013.

"My own belief at the moment is we will end up with a global agreement for some level of surcharges. The debate is fundamentally about how much rather than whether or not there will be some," Turner said. "There is a significant global support for an element of equity. The argument that equity is the best form of it has significant support around the world,"

The debate now centres on what sort of "exchange rate" there could be so that a surcharge made up of pure equity would equal a larger amount in less a pure form of capital such as contingent capital or CoCos, Turner said.