UK ‘sailing blindly’ into financial meltdown bigger than 2008, think tank warns

Canary Wharf financial financial district in London. © Reinhard Krause
Britain is heading for financial crisis worse than the 2008 collapse and the Bank of England (BoE) is “asleep at the wheel,” a think tank has warned.

A devastating report by the Adam Smith Institute (ASI) has blasted the BoE’s stress tests – which are meant to check the resilience of a bank to economic shocks – as being like “a ship radar system that cannot detect an iceberg.”

The report’s author, Durham University professor of finance and economics Kevin Dowd, said every single UK bank would fail “more rigorous” stress tests used by the US Federal Reserve.

He predicts Britain is sleepwalking into a second global financial crisis which will be even bigger than the last one.

Dowd argues in the report titled ‘No Stress II: the flaws in the Bank of England’s stress testing programme,’ that current BoE “health checks” on banks are “worse than useless.”

The purpose of the stress-testing program should be to highlight the vulnerability of our banking system and the need to rebuild it. Instead, it has achieved the exact opposite, portraying a weak banking system as strong,” he writes.

This is like having a ship radar system that cannot detect an iceberg in plain view.”

The Bank of England is asleep at the wheel again, and we will be back to beleaguered banksters begging for bailouts - and the taxpayer will be ripped off yet again, but bigger this time.”

Dowd also warned the Eurozone banking system is facing another crisis capable of bringing down British banks.

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 2007-08,” he wrote.

The economics professor claims the BoE’s stress tests rely on “risk weights” for banks’ assets, which have been criticised for downplaying the true riskiness of assets such as mortgages and sovereign debt.

The BoE’s use of flawed quantitative risk models also came under fire, as did its reliance on models that only imagine one single stress scenario at a time.

Former BoE FinancialPolicy Committee member Bob Jenkins has also attacked the Bank’s weak regulations in the past.

Jenkins has argued the BoE should require banks to hold much larger levels of equity to protect them from future shocks. At the moment, the BoE only requires private banks to have equity cushions of up to 5 percent – meaning if their assets fell below this, they would become insolvent.

The ASI report coincides with a leading research institute’s prediction that Britain will fall back into recession at some point in the next 18 months.

The National Institute of Economic and Social Research (NIESR) warned on Wednesday there is a 50 percent chance of recession due to generation uncertainty and the dropping value of the pound as a result of Brexit.