FSA warns of complacency in stress testing

In an open letter to chief executives published on its website yesterday, the FSA commented: "We were struck by how mild the firm-wide stress events were at some of the firms we visited... few firms were seeking scenarios... that might require a dividend cut, generate an annual loss or result in shortfalls against capital requirements." Stress tests should represent severe one-in-25-year downturns, the FSA said.

The regulator warned that management could either be underestimating the probability of more severe events, or overestimating their own ability to cope with them.

The FSA found it was important to involve senior management, and that results were better when one person, such as a chief risk officer, took responsibility.

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