Moments of stress
Nick Goodway on testing times for the banks
THERE is a secret room deep in the bowels of the Bank of England with a dark mahogony door on which is embossed in gilt the words “Doom & Gloom”. Only the most senior members of the Bank and the Prudential Regulation authority — those with at least a Master of Doom and preferably Professor of Purgatory attached to their name — are invited to meetings in this room.
For this is where the conditions for the stress test for the largest UK banks are devised each year. I can just imagine it: “Let’s slash China’s growth from its current forecast of 7% to just 1.7% before the end of the year,” suggests one member. Glacial guffaws all round.
“Property prices in Hong Kong crash 40%,” adds another of the gloom mer- chants. More chaotic chortling. “And let’s shrink the eurozone by at least 2%,” chips in a sonorous economist. Loud laughter and they adjourn for luncheon.
The result, of course, is the 2015 stress test. The Bank has taken criticism of last year’s test, which was very much UK-focused, to heart.
This year’s, if anything, swings too far the other way. Certainly it would appear to have HSBC and Standard Chartered more in its sights than Lloyds or RBS (it is also a wise move to take last year’s only failure, Co-op Bank, out of the equation).
The trouble with stress tests is that, almost by definition, they tend to be created on the basis of what has happened in the recent past and cannot be that certain of what is going to happen in the future.
There is little doubt that the next great financial crisis will emerge out of some situation or esoteric financial product we have not even heard of yet.
That is why even the biggest joker in the Bank of England’s most secret and depressing room did not dare come up with the most terrifying scenario: “It’s Friday May 8 and Ed Miliband and Labour have won an overall majority.”
That would be just too stressful for banks and bankers alike.