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Thursday, May 28, 2009

Doomsday Scenario

The FSA is currently stress testing banks under the doomsday scenario whereby unemployment reaches 3.7M, house prices halve and the recession lasts another 1.5 years.

Needless to say, the FSA will not be publishing the results of its stress test; lest it becomes a self fulfilling prophecy.

The question is, what will the FSA do if it finds that banks are likely to fail under such conditions?

The FSA claims that its use of stress tests is "embedded in our regular supervisory processes". That being the case, why did it not identify in the past banks, such as Northern Rock, that were already "basket cases"?

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