Adam Smith Institute report "No Stress: The flaws of the Bank of England's stress testing programme" has featured in City AM:
A THINK tank has called for an end to regulatory stress tests on banks, saying they are “sleep- walking” the sector into another financial crisis.
The Adam Smith Institute, a free market think tank, said the annual Bank of England tests – which are used to gauge the resilience of banks to volatile financials scenarios – gave false comfort to lenders because the rules were not rigorous enough.
It added the tests failed to apply a minimum ratio of capital to leverage for UK banks, which would have shown the banks to be weaker than when tested on risk weighted assets.
ASI report, “No Stress: the flaws in the Bank of England’s stress testing programme”, examines the Bank of England’s stress testing programme and challenges the Bank’s conclusion that the UK banking system has sufficient capital to withstand a new downturn and suggests that the UK banking system is actually very weak.
The report argues that the stress tests are fatally flawed because they use a very low ‘pass’ standard, a 4.5 percent minimum ratio of capital to risk-weighted assets. This minimum is well below those coming through under Basel III. Had the Bank carried out a test using these latter minima, the banking system would have failed the test.