Stability of banks being assessed by FSA
October 3, 2007
The Financial Services Authority is taking steps to check on the stability of certain banks that it considers to be high risk following the recent turmoil in the financial markets and the recent chaos that ensued with Northern Rock, where billions of pounds worth of savings were withdrawn by concerned savers after it was discovered that the lender had borrowed money from the Bank of England.
The FSA is now being more stringent with regards to the solvency of banks, asking those it considers to be at risk to prove themselves.
According to one industry expert: ‘The banks have been told to open their books. They need to prove they have stress-tested their finances to ensure they are prepared for the risks inherent in these market conditions.’ Amongst the banks that have been named as being under scrutiny by the Financial Services Authority are Paragon and the Alliance and Leicester according to reports. The FSA is concerned that the Northern Rock situation could have a domino effect, and therefore considers is important that other mortgage lenders prove that they are solvent.
The banks and lenders that have been labelled as higher risk by the Financial Services Authority according to reports all have high loans to savings rations – this means that they lend out far more than they receive by way of savings. The lenders now have to prove that they have access to enough funds to cover debt repayments as well as to continue lending. The FSA states that it would expect lenders to approach the Bank of England, in the way that Northern Rock did, in the event that funding was needed and no commercial funding was available.
Alan Wright
3rd October 2007
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