The UK's Financial Services Authority released details of its banking stress-test methodology on Thursday. I’m a big fan of stress-testing myself (in the form of sport rather than economics) and this weekend I face my toughest stress test to date: my first-ever half ironman.
I know it’s not QUITE the same, but I do have a few pearls of wisdom to share with the banks.
The FSA is checking the banks against three parameters: a peak-to-trough decline in GDP of 6 percent, unemployment at 12 percent and house prices down 50 percent.
On Sunday I’ll be checking myself against a 1.9 kilometer (1.2 mile) river swim, an 80k (50 mile) bike ride and a 22k run (half-marathon). And quite frankly, I think that’s a much more gruelling prospect.
Strategy is all important. Triathlon starts with the swim and it’s all about position. Too close to the front and you get swum over. Too far back and you get stuck behind the slow coaches (or eaten by a shark).
Banks need to get their position right, too. Think Standard Chartered with ample exposure to Asia vs. Northern Rock with big exposure to UK mortgages and wholesale money markets (swimming at the back with sharks).
The strategy lessons work both ways. RBS, for instance, is shedding non-core assets in Asia. I could do with shedding several pounds of non-core assets in the region of my bottom.
Pace is also crucial, particularly in a long race. The time limit for my half-ironman is 7.5 hours. That’s like watching all the Rocky films back-to-back right through Rocky IV, and THEN 20 minutes of Rocky V (or preferably skip that and get straight to the last 20 minutes of Rocky Balboa).
Bank earnings in the first part of 2009 had an unexpected bump up on pent-up activity in investment banking and a spate of capital raisings. Can they keep up the pace? Or is it a brief spurt?
Getting the right folks on side is also key. My fabulous coach Joe Beer has been coaxing me into a tougher training regime as I push up through the longer triathlon distances (thanks Joe!) Banks have already been quietly snapping up top talent from extinct and impoverished institutions.
And, at the risk of sound head-mistressy preparation is the main issue here. Any triathalete will tell you it’s impossible to cut corners in training. You can’t kid your body its fitter than it is.
Similarly, in these tougher times, banks can’t hide behind financial engineering and ill-conceived big-money deals. I’m willing to bet Lloyds wishes they’d done a bit more prep before they leapt headlong into that HBOS deal.
My coach’s last words to me ahead of my big race were: “you’ve worked hard and got more endurance than you could possibly need. You know what to do. Now you just get out there, don’t be distracted, and do it.”
If only the same could be said for the banks!
It’s an issue of confidence and maximum transparency. Investors want to know the banks have more endurance than they need and while the UK test may be tougher than the US, they don’t factor in the worst case scenario and they won’t be published. And banking stock reaction showed that, selling off on the news of the parameters.
Could the banks make it through an unemployment rate higher than 12 percent?
And could I do a full ironman? Let’s see how the half goes first …