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Bank accounts to get stress test 'protection'

11 December 2009 16:45:57

The FSA will improve bank account providers' risk management.  image
The FSA will improve bank account providers' risk management.
An update on the "stress testing" rules which could benefit bank account customers by promoting financial stability was unveiled by the City regulator today (December 11th).

The Financial Services Authority (FSA) said that it is "taking steps" to "strengthen" its approach to the tests, which can be conducted by both the regulator and the banks themselves.

Stress testing involves checking whether or not a bank will meet pre-set capital requirements if financial conditions deteriorate in the future.

One of the main reasons the global credit crunch caused such damage to market stability was that firms had tied up so many of their assets in complex financial instruments linked to loans, rather than ready cash.

This left many banks without enough of a "cash cushion" to meet their day-to-day financial obligations when banks stopped lending to each other in the crisis, forcing governments and central banks to launch potentially costly bailouts.

Effective stress testing will limit the chances of this occurring in the future, improving the stability of the banking system as a whole.

Paul Sharma, FSA director of prudential policy, said: "Stress and scenario testing should be an important element in firms' planning and risk management processes.

"It is essential that firms identify what could cause their business to fail and use this information to ensure that the relevant risks are sufficiently well-understood and appropriately managed to secure consumer protection and market confidence."

Northern Rock and Bradford & Bingley savings were both nationalised by the UK government in 2008.ADNFCR-2196-ID-19508953-ADNFCR ADNFCR-2196-ID-19464191-ADNFCR

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