David Prosser: The FSA and the great stress test tease

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The Independent Online

Outlook It took a bit of cajoling, but the Financial Services Authority has finally given us some details of the stress tests it has been using to assess the strength of banks' capital positions. We knew the FSA's bottom line was that banks should maintain core tier one capital ratios of at least 4 per cent, and now the regulator has told us what level of economic malaise it expects banks to plan for, on a worst case scenario, while still meeting this requirement.

The regulator's doomsday scenario is full of scary possibilities – a 50 per cent crash in house prices, for example, and unemployment hitting 3.7m. Not that the FSA is predicting this is what will happen, you understand, but it wants banks to plan their capital adequacy on the basis that it might. What we don't know, however, is the most important thing of all about these stress tests – how British banks have scored on them. The FSA has already rejected one freedom of information request put to it asking for this information and yesterday it reiterated its determination not to release any data on individual institutions.

That, of course, is in stark contrast to the approach taken by the American regulatory authorities, which have published the results of stress tests conducted on getting on for 20 big banks. So for any large US bank, you can look up the exact detail of how it scored on the American tests, as well as details of what it is doing to make good any capital shortfalls.

Why should this sort of information be kept secret in the UK? Well, the FSA's explanation is twofold. First, it says it never comments on individual institutions and second, it argues that while the US stress testing was conducted as a one-off exercise, its approach is continuous and evolving. The tests might be different next week, say, if it changes its assumptions about how bad, or otherwise, things might get.

Neither of those arguments really stacks up. The regulator clearly can't be expected to detail every last bit of its dealings with the banks it polices, but there is nothing to stop it choosing to comment on this specific issue. And people aren't daft – they know the FSA can only provide snapshots of how banks are performing on the tests at a certain moment in time, just as the US exercise only told us about the state of those banks at the moment the tests were done.

There is no reason why, for example, the FSA can't give quarterly, or half-yearly updates on banks' capital adequacy versus their ongoing stress tests. The results might not always be comparable with previous tests, but they would still give us a picture of how healthy – or not – the sector is at the time.

In an environment in which the most toxic thing of all in banking is uncertainty, providing greater certainty must make sense. Keeping secret something as basic as how British institutions are faring on the regulator's checks is only going to arouse suspicion, even if it is unfounded.

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