The UK is heading for a worse financial crisis than 2008 and Britain's banks are "in no fit state to withstand the storm", it has been warned.

A hard-hitting report by the Adam Smith Institute said the Bank of England's stress tests were "like having a ship radar system that cannot detect an iceberg".

The influential think-tank argued the flawed "health checks" masked the ability of British banks to cope with another major economic shock and accused the Bank of England of being "asleep at the wheel again".

The study highlighted 13 flaws in the stress test, which was compared to a "ridiculously easy exam with a ludicrously low pass standard".

It argued every single UK lender would currently fail "more rigorous" stress tests by the US Federal Reserve.

The research warned the UK is "sailing blindly into a second global financial crisis" and has called on the stress tests to be ditched, with decision-makers instead forced to be personally liable for risks.

The report's author, Kevin Dowd, professor of finance and economics at Durham University, said: "The purpose of the stress-testing programme should be to highlight the vulnerability of our banking system and the need to rebuild it.

"Instead, it has achieved the exact opposite, portraying a weak banking system as strong.

"This is like having a ship radar system that cannot detect an iceberg in plain view....

"The Bank of England is asleep at the wheel again, and we will be back to beleaguered banksters begging for bailouts - and the taxpayer will be ripped off yet again, but bigger this time."

The Bank of England last month said: "All our major banks and building societies passed last year's stress test which included losses twice those incurred during the global financial crisis".

Meanwhile, another influential group, the National Institute of Economic and Social Research (NIESR), is predicting the economy may enter recession over the next 18 months, with annual growth expected to hit 1.7% overall.

It predicts a decline of 0.2% in the third quarter and says there is a risk of "further deterioration" because of general uncertainty and the fall in the pound due to Britain's "shock result" in deciding to leave the EU.

The Confederation of British Industry's quarterly review of small and medium-sized manufacturers is adding to the gloom, with business optimism falling at its fastest pace since January 2009.

Just 8% of firms reported being hopeful over the period, while 53% said they were less optimistic.

The study of 472 companies revealed that plans for fresh investment in their businesses had been cut back.