22/3/11

By Sophie Baker

Financial Services Authority (FSA) has published the Prudential Risk Outlook (PRO), setting out its assessment of macroeconomic and financial trends as a context for its micro-prudential regulation and supervision of firms.

Analysis lying behind the PRO helps to inform on how the FSA sets priorities and deploys its resources – the FSA’s Business Plan, due later this week, will describe these priorities and the resulting resource requirements.

The last two years have seen the capital and liquidity position of the UK banks improve significantly, said the FSA, increasing resilience to shocks. The PRO notes, however, that there are still important risks to financial stability for the UK.

Incomplete progress in deleveraging requirements to create a less vulnerable systems; progress towards improved global capital and liquidity standards and the need, as that progress is achieved, to understand possible risk transfers and migrations to other parts of the financial system; credit risk to euro-zone counties, commercial real estate, and emerging markets facing rapid property price inflation; and risks created by a sustained period of low interest rates are all cited as important risk considerations.

“In the face of these still important risks it is vital that banks focus on achieving further progress to sound funding positions, maintain high capital ratios and adequate provisions, and that banks, insurance companies and other financial institutions focus strongly on the specific risks to which their business mix exposes them,” commented Adair Turner, FSA chairman.

The PRO features four sections: Macroeconomic context, looking at the global and UK economic environment and highlighting the importance of further gradual deleveraging in over-extended parts of the UK household and corporate sectors; the UK financial sector, focusing on profitability, capital strength and the funding position of UK banking and insurance sectors; Credit risk, discussing five areas of credit risks to UK firms – euro-zone, household lending, commercial property, US residential and commercial property and emerging markets; and the interest rate environment.
The Prudential Risk Outlook is available on the DFSA website.