New financial crisis with Bank of England `asleep at the wheel`, says ASI

New financial crisis with Bank of England `asleep at the wheel`, says ASI

By: Oliver Miller | Where To Trade | On:2016-08-04
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The research, conducted by Kevin Dowd, professor of finance and economics at Durham University, said "the UK banking system is still in poor financial shape and that the Bank of England's stress tests merely disguise that reality."

While the UK's banking system was given a clean bill of health in 2015, Dowd has savaged the BoE's stress tests as inadequate, refuting claims "that major UK banks could withstand another big shock."

"As the EU banking system goes into a renewed crisis, the UK banking system is in no fit state to withstand the storm. 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 '07-'08.

Professor Dowd called for regulators to push banks to generate larger equity cushions than the 5 percent currently required, while there are also calls for stress testing to be scrapped and replaced with a system where decision-makers are made personally responsible for their risks.

Another criticism was that the BoE's tests rely on what is known as analytical "risk weights" the bank assets, which have been criticized for understating the potential danger of assets like mortgages and sovereign debt.

In addition, he says the Bank’s tests are less rigorous than those of the US central bank, and that if UK lenders were tested by the Federal Reserve all of them would fail.

Other former regulators have raised questions about the Bank’s reliance on stress tests to gauge the resilience of UK banks.

Kevin Dowd, professor of finance and economics at Durham University, argues in a paper published today by the Adam Smith Institute that the Bank’s tests, which model various adverse economic scenarios each year such as a major fall in UK house prices or a Chinese property crash, have a series of “fatal flaws” and that the central bank is “asleep at the wheel”.

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