Britain’s finance sector is an “accident waiting to happen”, according to a report branding the Bank of England’s stress tests as “worse than useless”.
A study by the Adam Smith Institute (ASI) said the Bank’s tests – designed to measure whether a bank could withstand a severe financial shock – give false comfort by overstating the resilience of the finance sector.
It said major UK banks remain too highly leveraged and would all fail a stress test if it was based on market value of bank capital rather than book value.
(Dominic Lipinski/PA)
It comes as the banking industry marks 10 years since the collapse of Northern Rock, which acted as a precursor to the global financial crisis.
Professor Kevin Dowd, senior fellow of the ASI and author of the report, said: “The stress tests are about as useful as a cancer test that cannot detect cancer.
“They seek to demonstrate a financial resilience on the part of the UK banks that simply isn’t there.
“It is disturbing that 10 years on from Northern Rock, the best measure of leverage – those based on market values – indicate that UK banks are even more leveraged than they were then.
“The biggest risk facing the UK banking system now is the Bank of England’s own complacency.”
(Philip Toscano/PA)
The report said high bank leverage had helped fan the flames of the financial crisis, while market valuations of UK lenders indicate that some have hidden losses.
Asked whether efforts to root out bad behaviour within the financial system have worked, Prof Dowd told the Press Association: “The reform of corporate governance has been pretty menial.
“The problem is that senior bankers don’t have enough incentive to avoid excessive risks.
“There has to be strict liability of bank directors so they have serious skin in the game.
“The reason there has been so few prosecutions (over the financial crisis) is because it is hard to prove negligence.”
An HM Treasury spokesman said: “Since the financial crisis, we have fundamentally reformed the system of financial regulation to make it more resilient.
“Leading international bodies, including the IMF and Financial Stability Board, have commended the UK’s post-crisis work and we are at the forefront of international reforms.”