Banking - stress testing for human beings

The following is an interesting speech delivered by the Chair of the Financial Conduct Authority (FCA) in the UK, Mr Charles Randell.

Event: Gleneagles Pensions & Savings Symposium, UK
Delivered: 27 September 2019

Highlights

• Bank regulators test the resilience of the system to future economic downturns – for conduct regulators, it’s the human impact which also matters.
• The system needs to support savers to make good decisions in good times and bad.
• Affordability and appropriate arrears handling vital for a fair consumer debt market.

Extract

'Stress testing is one of the most important post-crisis reforms.  

No one can predict with certainty when the next recession is coming, but we know there will be another one at some stage. Perhaps not for many years – you won’t get any forward guidance from me.

So, every year Bank of England supervisors subject the major banks to a hypothetical stress test scenario, based on a set of severe but plausible assumptions about a future economic downturn. Bank of England policy committees then examine and publish the results, looking through 2 lenses: first, whether the banking system as a whole has the capital and liquidity it needs to provide credit to the real economy through the downturn; and secondly, whether any of the individual banks within the system needs to take action to strengthen its financial position to withstand the downturn. The results of the 2019 stress test will be published in the next few months.

But for a financial conduct regulator there’s a third, equally important lens we need to look through when we’re thinking about an economic downturn: the human impact.  Both the system and individual banks can be capitalised well enough to deal with their credit and investment losses in a downturn, but behind those losses will be millions of people in real distress.

Monetary and fiscal policy can each play a big role in determining the extent of this human impact – but monetary and fiscal interventions aren’t necessarily unlimited. Social policy can play a role, even where monetary or fiscal policy can’t. And financial regulation has a role to play as well.

So the Financial Conduct Authority, like other public authorities, must try to be ready for a downturn when it comes.

Today I want to outline the potential impact of an economic downturn on people in the UK, given the current state of their financial lives; to discuss the roles of the various authorities in responding to their needs; and to outline some of the choices with which policymakers may be faced. I also want to reinforce the FCA’s expectations about what financial firms should be doing, right now, regardless of when the next downturn comes.'

Full FCA speech