Davies Tells Banks to `Stress Test' Portfolios

By Jeremy Warner Davos, Switzerland | The Independent (London, England), February 1, 1997 | Go to article overview
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Davies Tells Banks to `Stress Test' Portfolios


Jeremy Warner Davos, Switzerland, The Independent (London, England)


Banks and other financial institutions are being urged by the Bank of England to add a new form of risk assessment - "stress testing" - to the welter of different tools already used to ensure financial prudence in their affairs.

Howard Davies, Deputy Governor of the Bank of England, said yesterday the next step in the provision of safeguards to prevent banking collapses "is for banks to develop models of market risk which allow them to calculate regulatory capital charges and to stress test their portfolios".

Speaking at the World Economic Forum in Davos, Switzerland, Mr Davies cited the possibility of financial crisis in Japan or a delay in plans for monetary union in Europe as examples of where banks need to be assessing their exposure to future market events. "Banks need to know how they would be affected by different possible market scenarios," he said at a seminar on financial fragility. Afterwards, Mr Davies said that the Bank had discovered several cases in the City of financial institutions whose pay structures had a tendency to encourage excessive risk taking by traders and other employees. The Bank of England is planning to publish the results of an in-depth study of pay and risk taking in the City within the next few weeks. Mr Davies stressed that this was not an attempt to interfere in how investment banks remunerate their employees. However, if remuneration policy was shown to be encouraging undue risks, then the Bank might take it into account in setting capital adequacy levels or through other channels of banking supervision.

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