Adam Smith Institute report "No Stress: The flaws of the Bank of England's stress testing programme" has featured in the Yorkshire Post:
The Bank of England’s banking stress tests are highly unreliable and could be “worse than useless”, a report has warned.Libertarian think-tank the Adam Smith Institute said the Bank’s assessment of how well funded institutions should be could provide “false comfort”.
Regular stress testing - checking banks and building societies have enough cash to weather market shocks - was introduced in 2014 as a way to assess the strength of the sector.
These tests are “fatally flawed” because they use a single scenario test with a low pass rate, the think-tank claimed.
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.