Leading think tank the Adam Smith Institute (ASI) thinks the UK’s financial sector is an “accident waiting to happen”.
It also slammed the Bank of England.
Not stressed enough
The Bank of England sets financial institutions regular “stress tests”. These are simulations which evaluate whether that institution can survive a financial shock, like the credit crisis of 2007.
However, ASI thinks these tests are “worse than useless,” overestimating the banking sector’s resilience.
That’s because the Bank of England uses book value, the value at which the bank itself places on its capital, rather than the market value. If market values were used, the banks would appear leveraged to a greater extent than they were a decade ago. They’d also fail the tests.
This report comes 10 years after bank Northern Rock’s collapse, a result of the financial crisis.
It marked the first bank run since the 1860s and heralded the start of the UK’s bailout program for other distressed institutions.
Instead of stress tests, ASI proposes a raise to the minimum capital banks must have. Then there are corporate governance reforms that could be made, to try and limit risky behaviour.
But at least the banks are separating their risk prone investment arms from their retail businesses.