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FSA issues stringent stress tests for financial companies

The Financial Services Authority (FSA) has this week "beefed up" plans for stress tests within the UK financial arena. Even though large scale changes to the way in which banks are "tested" have already been implemented, the FSA is now looking towards something known as "reverse stress testing". So what exactly is this and what impact will it have on the financial markets of the UK?

Initial indications from the FSA confirm that companies will need to increase their capital reserves and will undergo regular and stringent stress tests by the authorities. These tests will take account of various potential scenarios in the short, medium and longer term and flag any potential issues which individual companies may have. However, the reverse stress test will force companies to consider and publish details of potential "economic scenarios" which would put significant pressure on their businesses and their business model. So will this work?

It is rather bizarre to ask a business to identify its own weaknesses and publish these for everybody to see. Not only could this impact upon the value of underlying businesses but could cause short to medium term confusion in equity markets where any potential doubt about the future viability of a business, however bizarre or unlikely the economic scenario would have to be, could have serious implications. Many believe that the FSA has gone one step too far with this particular strategy and there is growing resistance to such a move.

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