Britain is charging headlong towards a new banking crisis on a “much grander scale” than the 2008 crash and the Bank of England is utterly unprepared for it, according to new research from free market think tank the Adam Smith Institute.
In an incredibly forthright report, written by Professor Kevin Dowd of Durham University, the ASI says that the current problems in Europe’s banking system — particularly in Italy, where stricken lender Monte dei Paschi is wreaking havoc — will spread to the UK.
This will then lead to a situation far in excess of the depths of the 2008-2008 crisis, when the government was forced to bailout several UK banks, including RBS and Lloyds. Both banks are still owned in part by the state.
“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,” Dowd writes in the report. Britain is “sailing blindly into a second financial crisis,” the report adds.
The Adam Smith Institute puts blames the Bank of England for the looming financial crisis it is predicting, saying it is “asleep at the wheel” when it comes to ensuring the strength of Britain’s banks. The ASI argues that the Bank’s current stress testing system is “worse than useless” and is allowing major issues in the financial sector to go almost entirely unnoticed.
“The purpose of the stress-testing programme 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. 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.”
Essentially, the Institute argues that the Bank of England’s stress tests — designed to test the ability of banks to weather economic storms — are too focused on the so-called “risk weights” given to assets held by the banks. These weights are often criticised for underplaying how risky some kinds of debt, including mortgages, actually are, and as a result, underplay the risks to the banks.
As an article from The Independent notes, the Bank of England’s stress tests are pretty lax if compared to those given by the US Federal Reserve to American banks, and if tested by the Fed, all of Britain’s banks would be at risk of failing.
The ASI’s findings come just five days after Europe-wide stress tests released by the European Banking Authority showed that Europe’s financial sector is in broadly good health, although it should be noted that the EBA’s tests have been criticised in the past, and that British lenders — especially RBS — were shown to be some of the weakest on the continent.
On Tuesday, European banking stocks crashed as investors digested the results of the stress tests, and began to worry about the long-term viability of the rescue package created for Monte dei Paschi.