Speaking at the FSA’s Annual Public Meeting yesterday, Sants suggested the UK was at the “peak of the economic cycle and have been warning banks for some time to prepare for deterioration in the credit markets”.
Sants said the FSA is focusing on ensuring firms have properly stress tested their business models to ensure they can withstand market volatility.
The concerns follow a number of warnings from FSA managing director of retail markets Clive Briault of potentially troubling times ahead for the sub-prime lending market.
FSA chairman Callum McCarthy also warned last week that the FSA was keeping a “close eye” on the collateralised debt obligations market.
In his last speech as FSA chief executive, John Tiner told the FSA’s APM that recent tightening and volatility in the credit markets might provide a challenge to the regulator.
Tiner said: “We have been keeping a close eye on developments and have commented in the past that risk has been under-priced. For us the key is to understand the exposures and the transmission system from investors into the banking sector which underpins financial stability and to be confident that the banks are stress testing these exposures to test the adequacy of the amount of capital in each firm and the system as a whole.
At present we believe the system overall is robust, but this is clearly an area the FSA will need to continue to watch very closely.”