THE Adam Smith Institute has just ‘lampooned’ the Bank of England stress tests – which sought to show that the UK’s banking system is prepared for the next crisis – as ‘worse than useless’, and designed to disguise the chronic weakness of the UK banking system.
The Institute stated yesterday that, ‘Every single UK bank would fail the more rigorous stress tests of the Federal Reserve,’ and insisted that the Bank of England is attempting to disguise that the ‘UK is sailing blindly into a second global financial crisis’. It urged, ‘Stress testing must be abolished and decision-makers made personally liable for risks.’
The Institute refuted the B of E’s claim that the major UK banks could withstand another big shock. The Institute points out that, ‘There is already a major crisis in Italy and mounting concerns about Deutsche Bank, the biggest bank in Europe and recently described by the International Monetary Fund as the most systemically dangerous bank in the world.’
It warns that, ‘The UK banking system is not much stronger. Current Bank of England stress tests are like a ridiculously easy exam with a ludicrously low pass standard. If you increase the pass standard to something reasonable, like that used by the Federal Reserve, then every single major bank in the UK would fail.’
The Institute points out that, ‘The report indicates no less than 13 fatal flaws in the stress tests, most of which cannot be fixed.’ It adds that, ‘There has never been a single case where stress tests were able to identify vulnerabilities in advance and fix them accordingly.
‘This was seen in Iceland, Ireland, Cyprus and Greece – entire national banking systems signed off as sound by stress tests, only to collapse shortly afterwards.’ The report’s author Kevin Dowd, professor of finance and economics at Durham University, said yesterday: ‘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.’
He warned: ‘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. The Bank of England is asleep at the wheel again, and we will be back to beleaguered bankers begging for bailouts – and the taxpayer will be ripped off yet again, but bigger this time.’
The report lists the ‘13 fatal flaws’ of the Bank’s testing confidence trick. Amongst them are, ‘The stress tests consider only one adverse stress scenario’; ‘The Bank’s stress scenario is insufficiently stressful’; ‘Stress tests are undermined by their reliance on useless risk models’; ‘The pass standards used in the Bank of England’s stress tests are way too low’; ‘The credibility of the stress tests is undermined by a blind spot at the heart of any stress testing programme: we cannot expect any central bank to anticipate the main risks facing the banking system, i.e., those it creates itself; Regulatory and central bank stress testing has an appalling track record. The relentless message was that the system is sound and policymakers were often lulled into a false sense of security. Again and again, individual institutions (Fannie Mae and Freddie Mac in the United States, Dexia Bank in Europe, etc.) and even entire national banking systems (Iceland, Ireland, Cyprus, Greece) were signed off as safe by stress tests only to collapse unexpectedly afterwards.’
The Adam Smith Institute has provided a service to all by its spearing of the Bank of England confidence tricksters who are seeking to lull the masses into a deep sleep just as the system is about to go up in smoke.
The warning must be heeded and an enormous campaign built up to prevent a new catastrophic crash, and a new bail-out of the bankers. The Tories must be brought down and a workers government formed that will nationalise the banks, under workers’ control, as part of a planned socialist economy where production is planned to satisfy the needs of the people and not the insatiable greed of the banking class. The remedy for the crisis of capitalism is a socialist revolution.
