BoE paints banks' doomsday scenario

THE failure of just one bank could wipe out a quarter of the entire UK banking system.

So huge are the loans that banks routinely make to each other that default by one institution would have a terrifying domino effect, a Bank of England study warns.

In the worst case - the total failure of one bank - not only would 25% of the system collapse, but another quarter would lose more than ten% of its readily available funds, the so-called 'tier one' capital.

This frightening scenario comes in a new report by Bank official Simon Wells, released on Friday with the Bank's quarterly economic bulletin.

Wells says the colossal size of interbank lending would spread the 'contagion' of a single failure throughout the system. Wells's figures show that interbank lending accounts for £908.8bn - 29% of all bank loans.

If the failed bank were unable to repay any of its interbank loans, 'in extreme cases, a single bank insolvency could trigger knock-on effects leading in the worst case to the failure of up to one quarter of the UK banking system.

'A further quarter of the banking system would suffer losses amounting to more than ten% of its tier one capital,' the report says.