UK bank stress tests 'much tougher' than ours
Published 18/03/2011 | 05:00
KEY elements of the "aggressive" stress tests used to measures Ireland's banks' abilities to withstand future shocks are based on far more benign scenarios than those used in a similar UK exercise.
The stark contrast between the two sets of stress tests emerged yesterday, after the UK's Financial Services Authority (FSA) published a lengthy document detailing how it will assess its banks.
The Central Bank of Ireland revealed the parameters for its stress tests a day earlier, with Governor Patrick Honohan vowing that "aggressive stress assumptions and modelling" would feature.
The Irish tests are understood to largely reflect scenarios used in Europe-wide stress tests, tests which have promised to be more robust than a widely-discredited exercise in 2010.
"I think you will find that our parameters will be tougher and tighter than the European ones," the FSA's chairman Adair Turner said. "They were last year."
An analysis of the Irish and UK tests shows UK banks will have to prove their ability to withstand harsher developments in commercial property prices, unemployment and growth than their Irish peers.
The less dramatic shocks modelled in the Irish tests could stem from the fact that the economy here has already taken a greater battering than the UK's, and therefore hasn't got as far to fall.
The "adverse" scenario used in the Irish tests includes a 22pc fall in commercial property prices in 2011, and a 1.5pc rise in prices for both 2012 and 2013.
The "anchor" scenario in the FSA tests -- described as "the minimum forward-looking adverse conditions" for which banks should prepare -- includes a 36.4pc fall in commercial property prices over the next four years.
For economic growth, the FSA is testing banks' ability to withstand a 4.3pc fall in gross domestic product (GDP) between now and 2015.
The Central Bank of Ireland's "adverse" case sees GDP falling by 1.6pc in 2011, before rebounding to 0.3pc growth in 2012, and 1.4pc growth in 2014.
Unemployment rates are predicted to increase from 14.6pc to 15.8pc in the Irish "adverse" case, while the UK's "anchor" scenario sees rates rising from 7.9pc to 12.4pc. The Irish tests do include greater house price falls than those modelled in the UK, with our "adverse" case including falls of 17.4pc in 2011 and 18.8pc in 2012, against 20.7pc over the next four years in the FSA version.
The European Banking Authority is set to publish the parameters for its stress tests today, some three months before the results are due.
Leaked details have already drawn criticism from sceptical analysts who deemed last year's tests useless, since banks like AIB passed them and then had to be rescued just months later.