FSA releases risk outlook for 2008

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LONDON – The UK Financial Services Authority (FSA) has released its Financial Risk Outlook (FRO) for 2008, warning of the enhanced risk exposure – both market-wide and sector-specific – that financial services firms are facing under turbulent market conditions.

The FRO highlights the strain on existing risk models, after its own stress testing was undermined by last year’s Northern Rock bank run – the first in the UK since the 19th century.

“To be clear, these are not firm predictions about what we think will actually happen but are a prudent attempt to highlight the risks that could impact consumers and firms in a less benign economy,” says Callum McCarthy, chairman of the FSA.

It also warns that increased financial pressure might divert firms’ attention away from the business-as-usual risks that usually preoccupy their risk analysis but have been eclipsed by the recent market crises.

The report also stresses the effects of recent turbulence on investor and consumer confidence, especially given many consumers are tightening belts as lenders raise their lending conditions.

As a consequence of the straining market, the FSA also underlines the increased risk of financial crime and the importance of a maintained industry effort in the fight against it.

The FRO is a precursor of the FSA’s Business Plan for 2008 (to be published next month) and helps to inform better understanding of the FSA’s supervisory strategy.