You know those stress tests that prove big banks are safe? They’re “fatally flawed” apparently

The tests are too easy to pass

Stress tests performed on major banks to ensure they are safe are “worse than useless”, according to a think tank.

The Adam Smith Institute said stress tests should be ended and replaced with a system of accountability within banks, so decision-makers are personally liable for the decisions they make.

Researchers compared different countries, such as the US and Iceland, and found those that had a system of individual accountability ended up having safer banking systems than those that were regulated by stress tests.

In Iceland, Ireland and Cyprus at different points the global recession, stress tests had failed to detect and prevent banks failing.

The report says stress tests provide false risk comfort, and create systemic instability by forcing banks to converge towards the Bank of England’s models.

“The Bank’s stress tests are therefore highly unreliable and the UK banking system is much weaker and more vulnerable than the Bank of England would have us believe,” the report says.

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