35 Per Cent House Price Fall Bank Test

35 Per Cent House Price Fall Bank Test.

The Bank of England has confirmed new stress tests to prevent any further collapses in the UK banking system and ensure that banking groups cope with tough market conditions rather than passing the burden on to the public effectively triggering or compounding exponentially a recession and the need for bailouts funded by the state.

Banks will be stress tested against a 35 per cent drop in house prices, interest rates of 4 per cent, a 3.5 per cent decline in GDP and a rise in the unemployment rate to 12 per cent.

Initially, the eight major banks and building societies of the UK will be tested later this year.

In the “credit crunch” recession that we are still fighting our way out of, house prices fell on average by 20% and up to 40% in some areas between 2007 and 2010.

Comment

Bank stress tests are being forced by the EU and we have to agree that responsible lending in addition to reduced exposure to high risk activities, not just in mortgage lending, but in the investment banking sector needs to be controlled.

The UK’s stress test is perhaps the toughest of all in Europe.  It needs to be.  Financial services and international banking accounts for over a third of UK GDP and huge proportion of exports.  Our banking system needs to be robust to ensure confidence not just on the UK, but around the globe as emerging nation businesses look for homes to develop products, services and employment into Western markets.

It will be interesting to see how banks react with their lending policy over the coming years.  That said, Britain is an island and with the population explosion expected over the next 10 years or, and the lack of housing supply, UK property prices will still rise with demand.