Bank of England stress tests 'like ship radar unable to detect an iceberg'

The Bank of England's stress tests are "worse than useless", according to a report claiming British banks would buckle under the strain of a major economic shock.

A study by the Adam Smith Institute said the Bank's stress tests are like a "ridiculously easy exam with a ludicrously low pass rate", which disguises the ability of UK banks to cope with an economic blow on the scale of the 2008 financial crisis.

The report, which pinpoints 13 flaws in the stress test, said every single UK lender would currently fail "more rigorous" stress tests by the US Federal Reserve.

It fears that the UK is "sailing blindly into a second global financial crisis" and has called on the stress tests to be scrapped in favour of forcing decision-makers to be personally liable for risks.

Kevin Dowd, professor of finance and economics at Durham University, who wrote the report, said: "The purpose of the stress-testing programme should be to highlight the vulnerability of our banking system and the need to rebuild it.

"Instead, it has achieved the exact opposite, portraying a weak banking system as strong. This is like having a ship radar system that cannot detect an iceberg in plain view.

"As the EU banking system goes into a renewed crisis, the UK banking system is in no fit state to withstand the storm.

"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 '07-'08.

"The Bank of England is asleep at the wheel again, and we will be back to beleaguered banksters begging for bailouts - and the taxpayer will be ripped off yet again, but bigger this time."

The research comes as the Royal Bank Scotland performed poorly compared to other British banking giants when the results of the European stress tests were announced on Friday.

Under serious pressure, RBS's capital levels fell by 7.5 percentage points - the third biggest fall of the 51 banks tested.

Deutsche Bank's share price took a hit at the end of June when it was branded one of the globe's riskiest banks by the International Monetary Fund.

There is also mounting concern over the state of the Italian banking sector.

The Bank of England said last month that "all our major banks and building societies passed last year's stress test which included losses twice those incurred during the global financial crisis".