Banks get stressed

The UK's Financial Services Authority has called on banks to improve stress testing of possible disruptive events, while the Basel Committee declared last year that firms must supplement their value-at-risk models with stress tests. But some bankers question whether stress testing should be prescribed by regulators at all. John Ferry investigates

Financial markets have had several years of relative stability, characterised by low volatility, tight credit spreads and falling default rates. What would happen, though, if credit spreads were to quickly widen following a cluster of high-profile defaults, if a terrorist attack were to cripple payment and settlement systems, or a global flu pandemic meant banks were drastically understaffed?

Any one of these events could disrupt markets and have knock-on effects across the financial