The Bank of England’s incredible stress tests

Source: Cobden Centre
by Prof Kevin Dowd

“The Bank of England’s 2016 stress tests are literally incredible. Of the seven big financial institutions covered in the exercise, only one (RBS) failed and that only by a narrow margin. So what is wrong with the stress tests? Well, one problem is that the Bank used book values instead of market values. … if one uses market values instead of book values, then four of the biggest five banks fail the test. … Another problem is the existence of a lot of hidden leverage associated with positions that do not appear on banks’ balance sheets, such as derivatives positions. The result is that no one can tell from banks’ published financial statements how leveraged the banks really are.” (08/14/17)