Wednesday 3 August 2016 1:00 am

Bank of England stress tests "worse than useless" according to free market think tank

The Bank of England's stress-testing regime is “worse than useless” according to a new report from free market think tank the Adam Smith Institute.

The tests gave the UK's banking system a clean bill of health in 2015, but the think tank argues that the regime is riven with fundamental flaws.

And days after alarm bells were sounded on the the capitalisation of Italian bank Montei dei Paschi; the Adam Smith Institute report said that the UK is “sailing blindly into a second financial crisis”.

Read More: European bank stress test results are in… RBS, see me after class

Report author and Durham University economics professor Kevin Dowd said: “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.”

Dowd added: “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 banksters begging for bailouts – and the taxpayer will be ripped off yet again, but bigger this time.”

Read More: BoE may raise banks' capital requirements further

In particular, Dowd found the UK tests are overly reliant in a singular adverse scenario, adding that it is insufficiently stressful, and warned that the results are compromised by political pressure.

And the think tank said that every single UK bank would fail the stress tests of the US federal reserve, raising alarming signs that the nation's banking system may be far weaker than expected.

In total, the think tank found 13 flaws in the UK system, and said that stress testing should be scrapped, and replaced with a system where decision makers are made personally responsible for risks.