BoE lets interest rates settle

The Bank of England’s decision to leave interest rates at 0.5% has spurred a slight rise in shares, with Lloyds, Barclays and Royal Bank of Scotland gaining an average of 3.5% in the past couple of days.  Bank shares also rose in the EU after initial reports from the stress tests being conducted on European banks.  These stress tests are intended to find out whether lending institutions are strong enough to withstand financial setbacks without being forced to raise more capital.

Financial analysts are warning that the stress tests may not be realistic in terms of the factors being used as guidelines.  For example, the recent tests assumed that bonds would fall only 20% if countries such as Greece, Portugal, Spain and Ireland were unable to pay outstanding debts.

Gary Jenkins of Evolution Securities said that in his view, if all of those countries were to default at the same time, bond prices would drop much more than 20%.  He also mentioned that if such a default occurred, investors would not lend money to the banks, so if the central banks couldn’t fund the entire banking sector there could be a total meltdown.

Though many banks are expected to be tested on their ability to weather a storm, the results of tests so far are incomplete and inconclusive, and there is increasing pressure for European authorities to release more comprehensive information.  Jenkins said that he thinks Europe is reluctant to do so, “Because the only time you really want to undertake a stress test of your banking system is when you already know the answer.”