Financial Services Authority Publishes Prudential Risk Outlook 2011
| Date Published | 3/18/2011 |
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On March 17, 2011, the Financial
Services Authority (FSA) published its first Prudential Risk Outlook (PRO),
which sets out the regulator’s assessment of macro economic and financial
trends, and sheds light on how the FSA sets priorities and deploys its
resources.
The document is divided into four
sections: macroeconomic context; UK financial sector; credit risks and interest
rate environment.
In its first issue the PRO
highlights important risks to financial stability, such as areas of credit risk
relating to vulnerable euro-zone countries and risks created by a sustained
period of low interest rates.
On the
residential mortgage sector, the report mentions that arrears rose through
early 2010 but that they have since come down. However, loan forbearance may
disguise to some extend the scale of the problem, and the situation may worsen
if interest rates increase. As expected, arrears are higher for borrowers
with high loan-to-value loans, for borrowers with buy-to-let loans and for
loans where income was self-certified, loans made by specialist lenders and to
borrowers with an impaired credit history. The report warns of the potential of
rising long term rates related to a steep yield curve and rising short-term
rates, and the potential credit risk exposure for lenders when the
predominantly adjustable rate mortgage portfolio will have to be re-priced.
Another source of potential credit risk is the out-of-money credit swaps. The
report urges lenders to include different interest rate scenarios in their
stress testing.
To Download the full document, click here.