Some good news from the Bank of England, where optimism has been in desperately short supply.
Stress tested every which way, they should be OK almost no matter what happens to the rest of us, Threadneedle Street reports today.
The Bank’s scenario includes unemployment rising to 8.5%, inflation rising to 17% and house prices falling by 31%. If those things happened, banks “would continue to be resilient, and be able to support households and businesses”, the Bank said today.
So that’s something.
But two points. While the banks have done many solid things to boost their balance sheets, the main reason they are solvent is that we bailed them out in 2008.
Whether they took money directly from the government or not, they were all saved by policy interventions not available to any other part of the economy.
They don’t get a pat on the back just for being solvent. They still owe us and always shall. Which in turn means that the pay of bank CEOs is effectively underwritten by the rest of us. Those guys just aren’t as clever or as valuable as their bonuses suggest.
Second, the stress test scenarios (inflation at 17%, gulp) no longer look like some extreme fantasy. Neither do house prices down a third or unemployment doubling.
Those things could happen, at which point the banks passing a stress test seems moot, since the stresses on everyone else would require nationwide therapy.
Probably, things won’t get anything like that bad. Let’s hope those scenarios are not remotely close to being tested in reality.
