Stress testing could have stopped collapse: Tucker

Giving evidence to the House of Commons Treasury select committee on 8 October, the outgoing deputy governor of the Bank of England said a regime of regular and concurrent stress tests of the banking system would have helped regulators understand the weaknesses on the balance sheets of Northern Rock and RBS.

When asked by committee chairman Andrew Tyrie if he had learnt any lessons from his tenure, Mr Tucker said: “Never take stability for granted. Things will always go wrong so you have to have a regime that can deal with failure.”

Speaking a week after the Bank published a 43-page discussion paper outlining its proposals for the ultimate design of banking stress tests, with results to be published on a yearly basis, Mr Tucker added that previous instances of stress testing had been undertaken in an idiosyncratic manner.

He said the proposed new regime would be “much more rigorous” and would provide a “richer set of information on how banks were run”.

Mr Tucker said the proposed tests would have helped to expose weaknesses in the RBS deal to take over Dutch bank ABN Amro. He added that the liquidity mismatch at RBS at the time was “absurd”.

On the future of the banking system, he said that stress tests should also incorporate international scenarios, with the next banking crisis likely to originate in Asia.

Bank boards should also “step up and do their job” and should know when they are “being bullshitted” by staff over an institution’s capital strength.

He also urged senior management at the Bank of England to be prepared to say to top bankers “we don’t think you’re up to this” if required.

Adviser View

William Hunter, director of Edinburgh-based Hunter Wealth Management, said: “Even with stress testing the level of risk would be very difficult to quantify. Banking functions should be split down the lines of retail and investment so that retail bank customers aren’t saddled with the same kind of losses as we saw during the crisis, and they should also be allowed to fail.”