Andrew Bailey, Governor of the Bank of England, attends the Bank of England Monetary Policy Report press conference, at the Bank of England, London, UK, February 2, 2023.
Swimming Pool | Reuters
LONDON — Bank of England Governor Andrew Bailey vowed Tuesday to be “highly vigilant” amid continued volatility, suggesting that the market is “testing” banks to find weaknesses.
Global banking stocks took a beating in March as contagion fears spread following the collapse of the US-based Silicon Valley Bank – the largest bank failure since the financial crisis – and the bailout of Credit Switzerland by Swiss rival UBS.
Bailey told the UK Treasury Select Committee that US authorities are dealing with specific issues related to regional banks in the state, and that Credit Suisse was an “institutional narrative” – but confirmed that the UK banking system is “in a strong position in terms of capital and liquidity”. .”
Friday saw a sharp sell-off in European banking stocks led by German Bankwhich puzzled many analysts given the German lender’s return to consistent profitability, along with its robust capital and liquidity position.
Deutsche partially recovered on Monday and made gains as market panic appeared to ease after First Citizens agreed to buy a large chunk of Silicon Valley Bank’s bankrupt assets.
“I also think about what we saw at the end of last week, particularly Friday, when there was (were) pretty sharp market moves in markets to test, if you will, companies,” Bailey told lawmakers.
“I wouldn’t say those are based on identified weaknesses in my opinion, more than testing. I mean, there’s quite a bit of testing going on right now.”
Bailey pointed to differences between US and UK regulations in the treatment of banking book interest rate risk (IRRBB) – which refers to potential risks to bank capital and income from adverse movements in interest rates – as a key reason why the UK system was not as vulnerable as US regional banks.
The Bank of England revealed last week that it had warned US regulators of the rising risks at SVB ahead of the collapse. to mark that its Prudential Regulation Authority “understood that SVB UK was exposed to concentration risk as it lent to and took deposits from the same relatively concentrated customer base in the innovation sector.” It said it had warned the company and the San Francisco Federal Reserve about this risk and about “overlap of customers on the asset and liability sides of the balance sheet” of SVB UK.
The US Federal Reserve and other central banks around the world have aggressively raised interest rates over the past year in an effort to curb skyrocketing inflation, and tightening monetary conditions have left some banks’ bond portfolios exposed.
Bailey also reiterated the market consensus that, within Europe, the forced sale of Credit Suisse was caused by “idiosyncratic” features that would not stress the UK banking system.
“Markets are currently trying to find weaknesses. I don’t think we’re quite where we were in 2007/8, we’re in a very different place than we were then, but we have to be very vigilant,” Bailey said in response to a question whether the banking system was now out of trouble.
“So when I give you the answer ‘I don’t think there will be a problem in the future’, I don’t mean for a moment to give you the idea that we’re not very vigilant, because we are. We’re in a period of fair said very heightened tension and alertness, and we will remain vigilant.”
