Britain’s banks may face a financial crisis

If Britain suffers a banking financial crisis, what would the effects be for Malaysia? I think it’s best if The Bank of England can ensure any potential crisis does not happen. According to Kevin Dowd, a professor of finance and economics in Durham University, the current Bank of England’s stress tests of the UK’s banks have a series of”fatal flaws” and that the tests has portrayed the banking system as strong even though it is currently weak. Professor Dowd also said that the eurozone banking system is not too far away from another crisis and this will affect UK’s major banks. He said, “Once contagion spreads from Italy to Germany and then to the UK, we will have a new banking crisis but on a much grander scale than 2007-08.”

He elaborated further that the flaws in the tests include the fact that the tests rely on analytical “risk weights” for banks’ assets and this may be potentially underplaying the true riskiness of various assets such as mortgages and sovereign debt. He said in comparison of the Federal Reserve of the US, the current tests are less rigorous. In fact, using the same standards as Federal Reserve meant that the UK banks would fail. To be frank, I am not sure how awesome Federal Reserve is because even until now, I do not see them as being sure with their direction. It’s mostly wait, gather information and hopefully a decision could be made.

Besides Professor Dowd’s assessment, The European Banking Authority (EBA) has also published the results of its own latest stress test exercise for 51 or the continent’s largest banks last Friday, including the Royal Bank of Scotland, Barclays, HSBC and Lloyds. The stress test revealed that even under the most adverse scenario, all three banks including HSBC, RBS and Barclays would still have a capital cushion of 8.7 per cent, 8 per cent and 7.3 per cent respectively. In other words, all three would still not be pressured to raise more equity. Before we heave a sigh of relief, the two previous EBA stress tests in 2011 and 2014 which gave the eurozone lenders clean bill of health was wrong and the lenders had to be rescued. Let’s hope nothing bad happens and that Britain’s new Prime Minister would be able to get a good deal from her counterparts Germany who’s also lady. Happy following.

written on 3 Aug 2016

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