UK bank stress model sees house prices down 50 pct

Britain's financial regulator said the tests it uses to gauge banks' capital strength assume house prices will halve and GDP shrink 6 percent in the current recession, making it the country's worst for more than 60 years.

Disclosing details of the 'stress tests' for the first time, the Financial Services Authority said they also assume unemployment peaking at 12 percent and no growth in the economy until 2011.

"The current stress scenario models a recession more severe and more prolonged than those which the UK suffered in the 1980s and 1990s and therefore more severe than any since the Second World War," the FSA said in a statement on Thursday.

The FSA said it would not disclose the results of individual banking stress tests.

But it confirmed that the tests had been applied to Royal Bank of Scotland and Lloyds Banking Group as part of their application to join the government's asset protection scheme, under which the state insures banks against further losses on risky debt-backed assets.

In March, Barclays said it had undergone a "detailed" stress test which had shown that it met the FSA's capital requirements. No other banks have commented on whether they have been tested.

The tests are designed to determine whether banks' core Tier 1 capital ratio would fall below the FSA's minimum threshold of 4 percent in the event of a worse-than-expected economic downturn.

The FSA's tests are based on a more gloomy scenario than those applied by regulators in the U.S.

There, banks' capital strength was tested against economic contraction of between 4 and 5 percent, a 30 percent peak-to-trough fall in house prices, and a peak unemployment rate of 10.3 percent, an FSA spokesperson said.