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| Bank of England governor Mark Carney on Tuesday |
There’s an art to conducting stress tests if you’re a banking regulator that wants to take credit for bolstering financial system stability.
You want the tests to look really tough, but for most banks still to pass them. If too many large ones fail then that will simply spread investor panic and invite criticism of the regulator for not knocking banks into shape, but if the tests look too easy then both their pass marks and the examiner lose credibility.
You have to show some teeth.
So, the Bank of England (BoE) sailed through its own stress test of UK banks with flying colours.
On Tuesday, it declared that in the event of an even more severe global and UK recession than through the financial crisis – with a 4.7% fall in UK GDP, investor flight, a sterling and equity market collapse, interest rates up at 4%, with a 40% fall in commercial real-estate values and more than 9% unemployment – UK banks could absorb £50 billion in losses in the first two years and still keep lending to creditworthy borrowers.
