UK Banks Not Strong Enough In Another Financial Crisis

The Adam Smith Institute, a major British think-tank has claimed that the Bank of England’s stress tests results are not a good indicator of the current health of the banking system. A report released by the Adam Smith Institute has identified 13 flaws in the tests and said that the tests were easy exams with a low bar for passing. It has claimed that all UK banks would fail the more rigorous tests conducted by the U.S. Federal Reserve. Kevin Dowd, professor of finance and economics at Durham University who contributed to the report has warned that the UK was heading for a financial crisis even bigger than the one faced in 2008-09.

In a statement, Kevin Dowd said,

The purpose of the stress-testing programme should be to highlight the vulnerability of our banking system and the need to rebuild it. 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. As the EU banking system goes into a renewed crisis, the UK banking system is in no fit state to withstand the storm.

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The report was released even as the European Banking Authority (EBA) unveiled the results of the stress tests it had conducted recently across 51 banks in Europe. The results showed that Royal Bank of Scotland would undergo the highest capital loss in case of an economic crisis but on the whole portrayed the European system as being stable and in a better position than before.

Dowd also believes that the EBA tests may not be credible anymore citing the dangerous position of Italian banks and reported strong performance of Deutsche Bank in the tests. Deutsche Bank was revealed as one of the riskiest banks by International Monetary Fund in June.

The stress tests conducted by Bank of England (BoE) on UK banks were introduced in 2014 in order to check the capability of UK banks to handle major financial shocks. Dowd stated that despite flaws being identified there was little chance of the regime being changed since the BoE is committed to them. He maintains that stress tests are a methodology with no track record to support it.

According to Dowd, the Brexit vote would usher in a period of uncertainty and the banking system is possibly heading to a bigger crisis than the one in 2008. Down went on to say that the opportunity to build the strength of the banking system had been wasted.

Charlie Harrison

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