Ten years on from Northern Rock, the Bank of England's stress tests are ‘worse than useless’ according to a study by the Adam Smith Institute (ASI).
The report, from one of the UK's leading exponents of classica liberalism, focused on the Bank of England’s 2016 test of the UK banking system's resilience.
The UK banking system is in much worse financial shape than the Bank of England suggests: the stress tests seek to demonstrate a resilience that simply isn’t there,' wrote the authors.
‘The UK banking system is still highly vulnerable and another major shock could bring it down again.’
The ASI identified major UK banks as still too highly leveraged.
‘Now the Bank of England uses its stress tests to reassure us that our banking system is safe,’ said the report's author Kevin Dowd.
‘If the Bank is correct, then we can conclude that it has successfully “fixed” the banking system after the trauma of the global financial crisis, but if the Bank is wrong, then the banking system is still not fixed and another major shock could bring it down again. Another major shock is only a matter of time.'
He added: ‘I believe the Bank is wrong and evidently so: our banking system is an accident waiting to happen.’
Dowd suggested the ‘dangerous’ stress test system should be abandoned and the Bank of England should in its place focus on raising capital standards, establishing tighter corporate governance and reforming accounting standards.