Banking on a catastrophe

Consumer debt ‘puts banks in danger’

THE banking system is an “accident waiting to happen”, a report has warned.

It claims the Bank of England is underestimating the dangers facing the sector.

This failure to properly measure banks’ ability to absorb heavy losses amounts to “a form of Russian roulette”, says the study by the Adam Smith Institute.

Kevin Dowd, author of the report and professor of finance and economics at Durham University, said: “The stress tests are about as useful as a cancer test that cannot detect cancer.”

The Bank of England refused to respond yesterday. However, Bank Governor Mark Carney has previously defended the robustness of its testing regime, which was put in place after the financial crisis.

Meanwhile, some of the world’s top experts in credit have also warned that levels of consumer debt in the UK are a “serious problem”.

Three quarters of the 2000 specialists questioned for the University of Edinburgh Business School expressed concerns about the amount of everyday debt households are carrying.

The warnings come a decade since the Bank of England was forced to step in to save Northern Rock, and the first run on a British bank for 141 years.

The alleged threat coincided with forecasts by finance firm AJ Bell that profits at Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered would top £36.2billion next year.

That’s a fraction more than the £35.8bn they made between them at the peak of the economic cycle in 2007, before the credit crunch slammed the brakes on.

While banks are raking it in, households are still feeling the squeeze. A survey by comparison site uSwitch.com found 37% of people say they have less disposable income than they did 10 years ago.

Stress tests are about as useful as a cancer test that cannot detect cancer