Banks need to stress test themselves

Reverse stress testing has been advised by the FSA (Financial Services Authority) in the UK who have said that stress testing in UK financial firms is too weak to prevent another Northern Rock crisis. They are advising firms to do “reverse stress tests” to identify high-risk scenarios. The want banks, building societies, investment firms and insurers to consider scenarios that may cause their firms business to become unviable.

Normally ‘stress testing’ refers to something banks do when considering clients, they stress loan rates taking into account potential rate hikes, but they have never been asked to stress test their own business models in the way they are presently being asked to do.

In a consultation paper published yesterday, the FSA said UK firms were still not testing themselves against sufficiently severe scenarios. The proposed changes are intended to better reflect the importance that is attached to robust stress and scenario testing and to clarify the Regulators expectations of firms.

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Will Specialist or Sub-Prime lenders be better off?

With the news coming out daily about prime lenders facing higher and higher impairment charges it begs the question of who will do better during a downturn, specialist/sub prime lenders or prime high street banks?

Banks stated that they feel impairments of up to 90 basis points were likely, some have revised this figure higher several times with NIB predicting impairment of upwards of 300 basis points. Sub-prime lenders on the other hand start off with predictions of high impairment and they price and gauge the risk accordingly from the outset. Given that starting point, could it be a case that Irish specialist lenders may come out the other side of the liquidity crisis with an overall book that fares proportionately on margins than other prime lenders?

To answer this question we must first consider margins, with many banks typical margin is from 1% to 1.5% on average, however, with many prime lenders this margin is  lower because of low margin trackers that were a point of heavy competition between …

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The weight of compliance

Compliance is set to become a core area in financial services because one result of the current financial crisis is that people will want to prevent another similar disaster from occurring and the method used to fight this will be (likely) regulation.

After the Great Depression there was a wave of compliance and regulatory measures brought in and it was during this time that the FDIC (Federal Deposit Insurance Corporation) was created, thus guaranteeing depositors funds were safe.

Basel II which was seen as the ‘new’ answer to how risk was mitigated will probably be replaced by some other form of guidance, we’ll call it Basel III for the sake of prediction, or Basel II 2.0 or whatever you like. The fact is that the burden of compliance is set to rise but if not done correctly it could actually happen with little or no benefit to clients or the broader economy.

If compliance becomes weighted heavily in a process rather than principles based approach then it could hamper innovation and the creation of …

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