Tiner warns banks of cross-market correlation risk

John Tiner, chief executive of the UK Financial Services Authority, has warned UK banks that their stress testing may not be adequate against a widespread downturn.

Speaking at the FSA's annual public meeting, Tiner warned that the markets are set for problems soon. "There are signs that the environment for regulated firms may become more challenging in the short and medium term," he said, predicting "an increased risk of sharp, and possibly coincident, corrections in a number of asset classes and areas".

This could be a problem for UK companies, he said, especially if they have not modelled correlations between different markets. He pointed out that stress testing of a crisis in one market is necessary but so is limiting exposure to a more widespread crash.

Another risk area was the rise in consumer borrowing in the UK. Tiner warned that a deteriorating labour market could lead to a crisis in the unsecured loan market, in what he called "a worrying picture that could quickly become a reality", as more than half the population found themselves unable to deal with sudden drops in income.