James Moore: Once bitten, twice shy – unless you are a stress-tested banker, it seems

Outlook: The stress tests are designed to gauge banks’ ability to deal with a really nasty economic shock

Is the Bank of England’s super-safe approach to regulation choking off the recovery of Britain’s financial industry and handing a gift to London’s rivals?

That’s how you will hear senior bankers tell it. As the Bank prepares to publish the results of its latest stress tests, those bankers who aren’t terminally stressed from dealing with them are loudly growling and gnashing their teeth.

Their case runs like this: the Bank is overly concerned about things that are really, really unlikely to happen. By forcing us to load up on capital to protect us against these “tail risks” they’re putting the industry’s growth prospects at risk, and that will damage the UK economy in the long run.

Because we can’t grow, we can’t employ people, and the Exchequer will have to do without the taxes that we can’t get one of the Big Four accountants to send through Luxembourg for us.

It sounds reasonable enough. The stress tests are designed to gauge banks’ ability to deal with a really nasty economic shock, one that has house prices falling by 35 per cent, base rates rising by 4 percentage points, unemployment soaring by 12 per cent, and GDP tumbling by 3.5 per cent.

That all seems unlikely given the current outlook, even if you take into account a certain twitchiness about the global economy’s health. It is a nightmare scenario and the chances of it happening are rated at no more than 1 in 20 by the Bank of England itself. Small wonder, then, that bankers argue that the greater risk is posed by the conservatism of banking regulators.

But here’s another nightmare scenario: US house prices plunge, with widespread defaults on mortgages. This sends a financial pandemic around the globe. The international money markets close, and weakened banks find it impossible to secure funding. Apparently AAA-rated institutions start to collapse. GDP plummets around the Western world and a brutal recession takes hold.

Does that sound similarly unthinkable? It happened in 2008. It’s worth remembering that the guilty men who ran the banking industry into the ground at that time all told the Treasury Select Committee that they “couldn’t have predicted” this nightmare scenario, all the while crying crocodile tears and eyeing their still-lucrative pension pots.

Worryingly, the banks’ line of reasoning is finding a sympathetic hearing in certain quarters, as memories of 2008 fade. Given that, perhaps we should be glad that the Bank doesn’t appear too inclined to listen.