Home / Articles / Finance sector an 'accident waiting to happen'

Finance sector an 'accident waiting to happen'


Britain’s finance sector is an “accident waiting to happen”, according to a new report.

The Bank of England’s stress tests, designed to measure a bank’s ability to survive a severe financial shock, are “worse than useless”, the study adds.

Major UK banks are still too highly leveraged and the current stress tests give a false comfort by overstating their resilience, the Adam Smith Institute says.
If those stress tests were based on market value of bank capital, rather than book value, the major banks would all fail, it added.
Professor Kevin Dowd, senior fellow of the ASI and the report’s author, said: “The stress tests are about as useful as a cancer test that cannot detect cancer.
“They seek to demonstrate a financial resilience on the part of the UK banks that simply isn’t there.
“It is disturbing that 10 years on from Northern Rock, the best measure of leverage – those based on market values – indicate that UK banks are even more leveraged than they were then.
“The biggest risk facing the UK banking system now is the Bank of England’s own complacency.”
He suggested that the stress test system is “dangerous” and should be scrapped.
The Bank of England should instead concentrate on raising capital standards, establishing tighter corporate governance and reforming accounting standards, he added.

Mr Dowd’s words come 10 years since the collapse of Northern Rock, which was one of the events leading up to the global financial crisis.
Ben Southwood, head of research at the Adam Smith Institute, said: “The Bank of England, understandably, wants to prepare for bad eventualities.
“But its definitions of risk are nonsensical-Italian sovereign debt counts as zero-risk-and easy to game.
“That means that the stress tests are yet another incentive for banks to put all their eggs in one basket.
“Even if the Bank were right about risks, this would make crises less frequent, but when they did arrive, much, much worse.
“The Bank of England, now with all its extra powers, should focus on improving the rules of the game, not micromanaging banks’ balance sheets.”
A Treasury spokesman responded: “Since the financial crisis, we have fundamentally reformed the system of financial regulation to make it more resilient.
“Leading international bodies, including the IMF and Financial Stability Board, have commended the UK’s post-crisis work and we are at the forefront of international reforms.”

Source: Sky

About Business Ideas UK

My name is Joel Bissitt. I have been an entrepreneur for 24 years and have run many small businesses across various sectors. For the last 10 years I have worked mainly within online media, franchising and small business start-ups. I am an author of various websites including Franchise UK https://www.franchise-uk.co.uk

Check Also

Compass can credit Cousins for top table legacy

When the average tenure of a FTSE-100 chief executive is five and a half …

Free Franchise Guide

Free Franchising Guide

 

Interested in buying a franchise? The our FREE Franchise Guide is a must! The guide contains lots of information to help you decide if franchising is right for you.

 

To claim your Free Franchise Guide click here