Thinktank claims we will face a new banking crisis, but on a much grander scale than 2007-08.
The annual stress tests imposed on Britain’s banks are "worse than useless" and we are "sailing blindly" into another global financial crisis, according to a scathing new report.
The Adam Smith Institute says that the stress tests, which are designed to ensure the nation’s banks are resilient enough to withstand financial shocks and unlikely to drag us into another crisis, “disguise the chronic weakness of the UK banking system”.
Kevin Dowd, the report's author and professor of finance and economics at Durham University, adds: "We’re sailing blindly into a second global financial crisis.”
What's wrong with the bank stress tests?
Under the current stress tests imposed by the Bank of England, financial institutions are put through fictional economic storms, such as a major fall in UK house prices or a Chinese market crash, to see if they could cope.
However, the Adam Smith Institute report claims these tests aren’t stringent enough.
“Europe faces a renewed banking crisis," it says.
"There is already a major crisis in Italy and mounting concerns about Deutsche Bank, the biggest bank in Europe and recently described by the International Monetary Fund as the most systemically dangerous bank in the world."
“The UK banking system is not much stronger. Current Bank of England stress tests are like a ridiculously easy exam with a ludicrously low pass standard.”
It goes on to argue that, if UK banks were subject to the more stringent tests imposed on US banks by the Federal Reserve, “every single major bank in the UK would fail.”
Its research identified 13 “fatal flaws” in the stress tests that cannot be fixed.
The fundamental problem is apparently that the tests are meant to find bank vulnerabilities, but there has never been a case where the stress tests have found a problem in advance and been able to fix it.
“The purpose of the stress-testing programme should be to highlight the vulnerability of our banking system and the need to rebuild it,” says Dowd.
“Instead, it has achieved the exact opposite, portraying a weak banking system as strong. This is like having a ship radar system that cannot detect an iceberg in plain view.”
Heading for another crisis?
The report goes on to claim that Europe is teetering on the brink of another financial crisis, which will take Britain with it.
“As the EU banking system goes into a renewed crisis, the UK banking system is in no fit state to withstand the storm,” says Dowd.
“Once contagion spreads from Italy to Germany and then to the UK, we will have a new banking crisis but on a much grander scale than 2007-08.”
“The Bank of England is asleep at the wheel again, and we will be back to beleaguered banksters begging for bailouts – and the taxpayer will be ripped off yet again, but bigger this time.”
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