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Fsa Releases Stress Test Methodology

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"the impact of a 50% peak-to-trough fall in house prices and a 60% peak-to-trough fall in commercial property prices."

http://www.rep-re.com/system/main.php?page...articleid=13805

Friday 17 April 2009

Capital depreciation in UK commercial property ended the first quarter at a pace consistent with declines seen in the first two months of 2009, at -3.1% in March, according to the IPD UK Monthly Index.

The compounded capital movement over the first quarter was thus -8.9%, according to the Index, which while a significant attenuation from the decline of the final three months of 2008, at -15.0%, is still much steeper than the decline over the same three-month period last year, at -4.7%. The all property peak-to-trough decline in UK commercial property now stands at -41.4%

*The IPD UK Annual Property Index remains the IPD flagship service in terms of the number of properties and length of historic coverage (28 years). At the end of 2008, the 11,214 properties covered by the Index were valued at £130billion.

With commerical at -41.4% from peak, 60% seems a low "stress" although a realistic low, with Sterling down +/- 20% in addition

foreign buyers could be at -60% already.

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Funny, thought they said last week they wouldn't release it.

They still haven't released the test results of individual banks, just the methodology, no?

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Guest DissipatedYouthIsValuable
They still haven't released the test results of individual banks, just the methodology, no?

"I'm sure you'll find our method for calculating the volume of this pie is correct, but I'm afraid I can't tell you the size of the pie I'm going to sell you."

"Marvellous. Give me three."

"I'm afraid there are no pies, sir."

"Have you got anything else?"

"I've got a spare button in my pocket, but you can't have it."

Edited by DissipatedYouthIsValuable

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http://www.reuters.com/article/rbssFinanci...S62406320090528

* Stress tests also assume GDP down 6 pct, jobless at 12 pct

* Test model sees no return to growth until 2011

* FSA says won't disclose individual bank stress tests

(Adds detail, background)

LONDON, May 28 (Reuters) - Britain's financial regulator said the tests it uses to gauge banks' capital strength assume house prices will halve and GDP shrink 6 percent in the current recession, making it the country's worst for more than 60 years.

:blink:

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Guest absolutezero
FSA

FT Alphaville

Funny, thought they said last week they wouldn't release it.

So if the FSA has used 50% falls in the price of residential property in their calculations, that must be significant, no?

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So if the FSA has used 50% falls in the price of residential property in their calculations, that must be significant, no?

Oh yes. But no doubt a few bulls will tell you otherwise!

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LONDON (Reuters) - The country's financial regulator said the tests it uses to gauge banks' capital strength assume house prices will halve and GDP shrink 6 percent in the current recession, making it the country's worst for more than 60 years.

Flippin' heck.

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http://www.rte.ie/business/2009/0528/britain.html

UK banks stress tests see 50% house price fall

Thursday, 28 May 2009 13:11

Britain's financial regulator said the tests it uses to gauge banks' capital strength assume house prices will halve and GDP shrink by 6% in the current recession, making it the country's worst for more than 60 years.

Publishing details of its 'stress tests' for the first time, the UK Financial Services Authority said they assumed unemployment peaking at 12%, and no growth in the economy until 2011.

The tests also factor in a 60% peak-to-trough slump in commercial property values, outstripping the assumed 50% drop in residential prices.

Advertisement'The current stress scenario models a recession more severe and more prolonged than those which the UK suffered in the 1980s and 1990s and therefore more severe than any since the Second World War,' the FSA said.

The FSA said it would not disclose how individual banks had fared in the stress test. But it confirmed that the test had been applied to Royal Bank of Scotland and Lloyds Banking Group as part of their application to join the government's asset protection scheme, under which the state insures banks against losses on risky debt-backed assets.

In March, Barclays said it had undergone a 'detailed' stress test which had shown that it met the FSA's capital requirements. No other banks have commented on whether they have been tested or on the outcome of any test.

According to the closely watched Halifax house price survey, UK residential home values were down 22% in April from their August 2007 peak, against the FSA's assumption of a 50% fall."

Edited by threetimesdead

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So if the FSA has used 50% falls in the price of residential property in their calculations, that must be significant, no?

They never got anything right - 50% is another of their wishfull thinking

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So if the FSA has used 50% falls in the price of residential property in their calculations, that must be significant, no?

Yes, very.

To be fair it doesn't seem much point in doing such tests if they rely on the most optimistic outcome, so they had to pick a figure that was a 'worst case scenario', doesn't mean they think it will fall that much. They have to build in some degree of safety net into their calculations, I would think that was good statistical sense.

It would seem to indicate that they would not at all be suprised to see 40% off peak though, which I guess is pretty bleak. I remember when I looked at this site and on the main page FP was predicting -35%, which at the time I though was pie in the sky. He has been proved right of course.

40% would be pretty good, I expect it will be a lot worse in certain areas/certain types of property though.

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Should add that it's no suprise they haven't released the actual tests. At 50% I would expect most banks and building societies to be in huge trouble.

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So if the FSA has used 50% falls in the price of residential property in their calculations, that must be significant, no?

http://business.timesonline.co.uk/tol/busi...icle6377688.ece

The FSA scenario was not meant to reflect the regulators' view of the most likely economic outcome, but was designed to test how the banks would cope if confronted with the worse recession since the Second World War.

Problem is what happens if growth doesn't return and we have stagnation for a number of years?

The stress tests are not really testing for the worst.

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http://business.timesonline.co.uk/tol/busi...icle6377688.ece

Problem is what happens if growth doesn't return and we have stagnation for a number of years?

The stress tests are not really testing for the worst.

Because if they test for the worst - no money in the world and no printing machines will be enough to avoid banks going down - derivatives

So their 50% is not even an educated guess - is just a guess

After all they don't employ economists or even accountants - they employ lawyers - blah, blah, blah

Edited by threetimesdead

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Because if they test for the worst - no money in the world and no printing machines will be enough to avoid banks going down - derivatives

So their 50% is not even an educated guess - is just a guess

I think we can assume it's a best guess and we HOPE it proves accurate.

To test for the worse would be an admission the economic miracle was a fraud, that will not happen with the current powers.

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So if the FSA has used 50% falls in the price of residential property in their calculations, that must be significant, no?

Could it be as significant as Moodys downgrading on "the assumption now is 40% falls ":

Published: April 15 2009 22:08

Nine building societies, including Nationwide, have been downgraded by Moody’s amid concerns about their exposure to falling house prices and specialist mortgage loans.

The ratings agency said it had made the downgrades after stress testing how mutuals would perform against a base case scenario of a 40 per cent fall in house prices from the peak of the boom. It also stress-tested a more extreme scenario based on a 60 per cent fall.

Some societies have been downgraded by three notches, making it tougher and more expensive for them to raise or roll over funding in the wholesale markets – although all mutuals rely primarily on retail deposits to fund themselves.

It is also possible that some societies will find it harder to attract deposits from local councils or small pension funds which may only invest money in banks or building societies with an A grade credit rating.

Moody’s said it had changed its assumptions about UK house prices in the past few months. It also stress-tested the mutuals’ commercial loan portfolios, where it expects the performance to worsen during the next few years.

Marjan Riggi of Moody’s said: “What’s different is the loss expectation is higher than it was three or four months ago looking at the economic forecasts on housing.

Last year we were looking at mortgage lenders and stress-testing a 25 per cent fall in house prices. In the past three or four months that assumption has changed to a 40 per cent fall, which is a considerable difference.”

Could the FSA and Moodys got this wrong or do you think maybe this time they are TRYING to get it right?

The stress tests for the US were 30% falls but how much did the US market inflate it was about 50% less than the UK wasn't it? I read the UK market inflated 147% since 1999, last crash saw property inflate 47% and falls 35% .

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Could it be as significant as Moodys downgrading on "the assumption now is 40% falls ":

Could the FSA and Moodys got this wrong or do you think maybe this time they are TRYING to get it right?

The stress tests for the US were 30% falls but how much did the US market inflate it was about 50% less than the UK wasn't it? I read the UK market inflated 147% since 1999, last crash saw property inflate 47% and falls 35% .

US has 32.2% from peak already, the UK should catch them in 2010 although presently our course is steeper.

Source: Standard & Poor's and Fiserv

The chart above shows the index levels for the U.S. National Home Price Index, as well as its annual

returns. As of March 2009, average home prices across the United States are at similar levels to what

they were in the fourth quarter of 2002. From the peak in the second quarter of 2006, average home

prices are down 32.2%.

http://www2.standardandpoors.com/portal/si...,0,0,0,0,0.html

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Could it be as significant as Moodys downgrading on "the assumption now is 40% falls ":

Could the FSA and Moodys got this wrong or do you think maybe this time they are TRYING to get it right?

The stress tests for the US were 30% falls but how much did the US market inflate it was about 50% less than the UK wasn't it? I read the UK market inflated 147% since 1999, last crash saw property inflate 47% and falls 35% .

Unlike the FSA, Moody's does employ economists and accountants.

According to IMF, even after the 22% fall from 2007 peak, the UK market is 30% above the historical averages - 30/130 gives you another 23% fall and a total of 45% peak to through BUT

Prices never move in a straight line - they over shoot on the way up, and go through the historical average on the way down - on a graph that would look like a wave (prices) with a strike through line across, not under it (historical averages) - this is where the Moody's 60% comes from

The 60% brakes down into 2 components -

32% from the ned of securitisations and lax lending - already there, but not in a full blow due to market manipulation by means of the BoE base rate and QE

25-30% from economic recession factors (unemployment, wage stagnation, disposable incomes) - just beginning to unravel and will be in a full swing by Q4 2010/Q1 2011

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Yes, very.

To be fair it doesn't seem much point in doing such tests if they rely on the most optimistic outcome, so they had to pick a figure that was a 'worst case scenario', doesn't mean they think it will fall that much. They have to build in some degree of safety net into their calculations, I would think that was good statistical sense.

It would seem to indicate that they would not at all be suprised to see 40% off peak though, which I guess is pretty bleak. I remember when I looked at this site and on the main page FP was predicting -35%, which at the time I though was pie in the sky. He has been proved right of course.

40% would be pretty good, I expect it will be a lot worse in certain areas/certain types of property though.

I, like you, thought 35 - 40% seemed a big drop until I read this earlier this year:

The first boom and bust happened in the early 1970s. From 1971 to 1973, prices rose by 64 per cent in real terms. By the summer of 1977 they had fallen back by 30 per cent. The second happened between 1978 and 1982. Prices rose by 69 per cent between the start of 1978 and mid-1981, then fell 6.3 per cent in the next year. Boom and bust number three came between 1986 and 1995. This saw prices rise by 47 per cent in real terms between 1986 and 1989 and fall back 37 per cent by 1995.

Taking the Nationwide’s figures, the 1997 to 2007 boom saw prices rise by 147 per cent in real terms. Within that, prices rose 76 per cent between 2001 and 2007. In the developing bust, prices have fallen by 18.5 per cent since the third quarter of 2007.

I think what is different this time is the SIZE of the bubble due to the RMBS market. Don't know if you have seen the RMBS doc that Timm posted at this thread scroll to almost at the bottom, but it says a lot:

Timms RMBS Link

This boom has been driven by the RMBS market:

One reason for this boom in cheap home loans was the rise in 'residential mortgage-backed securities' (RMBS). These were bonds made up of parcels of mortgages which were sold to major investors, such as pension funds and insurance companies. Alas, as the US and UK housing markets started to slump, the value of these mortgage bonds dived and the market froze. The effective collapse of the RMBS market means that this one-off credit event may not return for years, if not decades

A "one of credit event" accounting for nearly 2/3rds of lending by 2007 or £200bn , take that out of the equation and leave lenders reliant on deposits at a time of low interest rates and a collapsing economy and things do not look good especially when interest rates have only one way to go. 50% falls could well be conservative .

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The stress tests are not really testing for the worst.

True.

The 'worst' is something on the level of a planet eating 'thing' from the nether regions of hell chewing its way through the entire universe. And farting us out afterwards.

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I, like you, thought 35 - 40% seemed a big drop until I read this earlier this year:

I think what is different this time is the SIZE of the bubble due to the RMBS market. Don't know if you have seen the RMBS doc that Timm posted at this thread scroll to almost at the bottom, but it says a lot:

Timms RMBS Link

This boom has been driven by the RMBS market:

A "one of credit event" accounting for nearly 2/3rds of lending by 2007 or £200bn , take that out of the equation and leave lenders reliant on deposits at a time of low interest rates and a collapsing economy and things do not look good especially when interest rates have only one way to go. 50% falls could well be conservative .

For the entire period - 2001-2007 - that was GBP700bln according to the BoE - or 1/3 of the total value of all mortgaged properties in UK

That funding is gone now - but the double wammy is that the banks have to repay the loans whilst the funds are tied up in briks and mortar

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