UK banks still sickly, 10 years on from run on Northern Rock

New report shows

The British banking system is an ‘accident waiting to happen’ according to a new report released today by the Adam Smith Institute, ten years after the run on Northern Rock heralded the beginning of the financial crisis.

Kevin Dowd, author of the report and professor of finance and economics at Durham University, says the Bank of England’s stress tests continue to greatly overstate the financial resilience of the UK banking system.

High bank leverage was a key contributing factor to the severity of the financial crisis and UK banks are still highly leveraged, but easy-to-game risk weighting measures still hide this.

The Bank of England’s stress tests look at book-values – values of assets and securities recorded in accounts. On these measurements UK banks’ leverage fell by around a third since 2006. Using more accurate numbers based on real market value reveals that banks’ leverage has actually increased by about a half.

Market-valuations of bank capital are more reliable than book valuations, says the report, indicating that markets believe banks are still carrying large hidden losses not reflected in book valuations or in the stress tests. By doing so, the report suggests, the stress tests provide the public with false assurance about the financial health of their banks.