We really don't want the banks knocking on our doors again

Outlook

Much of the City was positively dizzy with the spin coming from the banks in the wake of the Bank of England’s publication of its stress test results.

Even the Old Lady of Threadneedle Street wasn’t immune.

Its Governor, Mark Carney, and his political masters indulged in a little back-slapping, taking the view that while there’s still work to be done, the industry is a lot safer than it was.

That’s true, but we’re not out of the woods yet. And even if the scenario the Bank presented to test the banks was supposedly extreme (It wasn’t. See yesterday’s Outlook) two banks still failed.

Hang on a second, you’re saying, I thought only Co-op Bank failed. Well, the Bank of England doesn’t much like to talk in terms of passes and fails. And yes, it’s true that only Co-op officially failed, after the tests showed that it would have run out of cash had the Bank’s scenario been for real.

But Royal Bank of Scotland would have failed were it not for some fast work with its capital plan to ensure that it was just about able to scrape through while the tests were in operation.

Now, here’s the important bit. While the spin that RBS was putting about yesterday doesn’t reflect particularly well on this supposedly good, safe bank (there are a lot of ex-Government people in its communications department), the way it dealt with its issues indicates that at least someone up there has some idea of what they are doing.

RBS is and remains a worry. It is still, as these events have demonstrated, weak. It may be more susceptible to other shocks that might not hit Co-op, a smaller, simpler, institution, so badly.

But contrast its performance with that of Co-op during the test. RBS at least recognised that it had a problem and acted on it. The supposedly ethical Co-op took a different stance. It simply warned everyone that it expected to fail, and then did so. After that, it got to work re-jigging its executive long-term incentive plan so its top people could still get paid.

Is that harsh? Co-op is still working on shoring up its capital. But the very fact that the bank is looking at alternative ways to hand chief executive Niall Booker and his chums their bonuses, having cancelled a vote on the long-term incentive scheme at the time it warned of the failure, speaks volumes about where the priorities of its top team lie.

As for the rest of the industry? Yes, it’s safer, although another round of tests featuring a different scenario next year will gauge how much safer and might pose more challenges to the likes of Barclays and Standard Chartered, which appeared to sail through this one.

But whatever the Bank of England says, and whatever its political masters say, you’re still underwriting the banking industry. Banks might have had to file living wills and stockpile more cash than they would have countenanced before the financial crisis, but if things get really dicey, you know whose doors they will be knocking on.

Tackle housing shortages or face an economic shock

House prices are keeping all sorts of people awake at night. The Bank of England’s deputy governor, Sir Jon Cunliffe, says the housing market is still the “greatest domestic risk to financial stability”.

It seems to have occupied that position for as long as anyone can remember, and small wonder. The risk posed by a bubble building up and then bursting in London and the South East is very real.

Growth has been moderated, in part by the Bank’s efforts to regulate lending, in part by the lenders themselves. They now conduct the sort of rigorous assessment of borrowers’ ability to repay that they should have been doing years ago.

However, there remains a vast reservoir of pent-up demand for housing out there, combined with a gross undersupply. Little action has been taken to address that issue.

A couple of garden cities won’t be enough, and policymakers appear reluctant to delve into issues such as under-occupancy and non-occupancy. Perhaps it’s because addressing them isn’t easy.

However, addressing the consequences of the economic shock of a housing bubble bursting would be even harder. It’s time they woke up to that fact.

Morrisons will not be wishing Tesco much festive cheer

Some good news for Tesco? As the grocery market skipped back into growth, Britain’s biggest supermarket (it’s worth remembering that) produced its best performance since June, according to the widely scrutinised Kantar figures.

Dave Lewis and his team won’t be donning the party hats just yet. Tesco is looking good only because it has, in effect, undertaken Morrisons. Its sales are now falling at a slower rate.

But if the trend continues and Tesco gets through Christmas relatively unscathed, the new year could more uncomfortable in Bradford than it is in Cheshunt.

Morrisons boss Dalton Philips is looking increasingly exposed, with his half-hearted price-match plan brutally exposed in a Lidl ad which listed all the conditions Morrisons shoppers had to meet, then suggested: “Why not just go to Lidl?”

A corporate blood-letting at Morrisons would divert attention away from Tesco’s troubles and provide Mr Lewis with a commodity that money can’t buy: breathing space.