No Stress IV: The flaws in the Bank of England’s 2018 stress tests

A new paper by Kevin Dowd, Professor of Professor of Finance and Economics at Durham University and Senior Fellow at the ASI, explains the inadequacy of the Bank of England’s stress tests and argues that the UK’s banking system is still an accident waiting to happen:

• The Bank of England has now undertaken five annual concurrent stress tests of the financial health of the UK banking system. Like their successors, the 2018 stress tests continue the Bank’s fine tradition of trying to persuade us that the UK banking system is strong when the evidence suggests otherwise. Their results are wholly lacking in credibility.

• The stress tests are compromised by:

  • Conflicted objectives,

  • An inadequate number of stress scenarios,

  • Low pass standards,

  • Reliance on unreliable metrics, and

  • Questionable modelling.

• Their key stressed capital ratios, projected impairment charges, and house price losses are too low to be believable.

• The results from the stress tests are contradicted by the evidence from banks’ latest balance sheets and market prices, which show that banks are weak now, before any stress, rather than strong after a future stress that is supposedly more severe than the GFC.

• The continuing weakness of UK banks after a long economic recovery is testimony to the failure of the Bank of England to perform its core function and rebuild the strength of the banking system after the trauma of the crisis.