British banking remains "accident waiting to happen" 10 years after Northern Rock collapse, report claims

William Turvill
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(FILES) File picture of customers queue
Northern Rock collapsed 10 years ago this week (Source: Getty)

British banking is an “accident waiting to happen”, according to a new report from think tank the Adam Smith Institute marking the 10-year anniversary of the Northern Rock crash.

Today’s paper, authored by Durham University finance and economics professor Kevin Dowd, also claims the Bank of England’s stress tests are “seriously flawed” and that banks are still too highly leveraged.

“The stress tests are about as useful as a cancer test that cannot detect cancer,” Dowd said.

“They seek to demonstrate a financial resilience on the part of UK banks that simply isn’t there.

“It is disturbing that 10 years on from Northern Rock, the best measures 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.”

Read more: A decade on from the crunch, we still need to confront 'too big to fail'

The report calls on the Bank to scrap its stress test programme and focus on raising capital standards, establishing tighter corporate governance and reforming accounting standards.

The findings of the report have drawn criticism from a number of figures, including Jayne-Anne Gadhia, chief executive of Virgin Money, which now owns the “good” assets of Northern Rock.

“My experience, and the objective data, say to me that the interventions that have been made since Northern Rock crashed mean that a crash of that type, in my view, could not happen again,” she told City A.M.

Goodbody banking analyst John Cronin said: “While I have sympathy with the argument that banks are still heavily leveraged along with the fact that certain institutions benefit substantially from very light risk-weighted assets intensity, I believe that the views expressed in relation to the BoE stress tests do not present a valid conclusion.”

Sir Charlie Bean, former deputy governor of the Bank of England, defended Threadneedle Street.

He told City A.M. that “some of the things Dowd criticises the tests for are things the Bank (and the FPC in particular) have been worried about for a long time, such as the gameability of risk weights. And the Bank has long been in the vanguard of pushing for higher capital ratios – the push back has come from the financial sector and politicians.”

Read more: Northern Rock: 10 years on from the bank that failed

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