In the midst of continuous turbulence, Bank of England Governor Andrew Bailey pledged to be “very vigilant” on Tuesday (March 28, 2023) and said that the market is “testing out” banks to identify flaws.
The worst bank failure since the financial crisis, the collapse of Silicon Valley Bank in the United States, and the emergency rescue of Credit Suisse by Swiss rival UBS have all contributed to a decline in global banking equities in March.
Bailey told the U.K.’s Treasury Select Committee that U.S. authorities are dealing with particular issues relating to regional banks stateside, and that Credit Suisse was an “institutional story” but affirmed that the U.K. banking system is “in a strong position capital and liquidity-wise.”
Several analysts were perplexed by the dramatic sell-off of European banking stocks on Friday, which was led by Deutsche Bank despite the German lender’s return to continuous profitability and strong capital and liquidity position.
As First Citizens agreed to purchase a sizable portion of the assets of the failing Silicon Valley Bank, Deutsche marginally rebounded on Monday to lead gains as the market panic appeared to abate.
Markets are trying on to find points of weakness at the moment. I don’t think we are at all in the place that we were in 2007/8, we’re in a very different place to then, but we have to be very vigilant.
Andrew Bailey (Bank of England Governor)
“I also think what we saw at the tail end of last week, Friday in particular, when there were quite sharp market movements were moves in markets to, if you like, test out firms,” Bailey told lawmakers.
“I would not want to say that those in my estimation are based on identified weaknesses, more than testing out, I mean there is quite a bit of testing out going on at the moment.”
Bailey pointed out to differences between U.S. and U.K. regulations in the treatment of interest rate risk in the banking book (IRRBB) which refers to prospective risks to bank capital and earnings from adverse movements in interest rates as a key reason why the British system was not as exposed as were U.S. regional banks.
The Bank of England revealed last week that it warned U.S. regulators of the mounting risks at SVB prior to its collapse, flagging that its Prudential Regulation Authority had “understood that SVB UK was exposed to concentration risk, as it provided loans to and took deposits from the same relatively concentrated client base in the innovation sector.”
It said it warned the firm and the San Francisco Federal Reserve of this risk and of “overlap of clients on the asset and liability side of the balance sheet” of SVB UK.
The U.S. Federal Reserve and other central banks around the world have hiked interest rates aggressively over the past year, in a bid to rein in soaring inflation, and tightening monetary conditions have left some banks’ bond portfolios exposed.
Bailey also echoed market consensus that, within Europe, the forced sale of Credit Suisse was caused by “idiosyncratic” features that would not cause stress in the U.K. banking system.
“Markets are trying on to find points of weakness at the moment. I don’t think we are at all in the place that we were in 2007/8, we’re in a very different place to then, but we have to be very vigilant,” Bailey said in response to a question about whether the banking system was now out of the woods.
“So if I give you the answer ‘I don’t think there’s a problem going forwards,’ I do not want to give you for a moment the idea that we are not very vigilant, because we are. We are in a period of very heightened, frankly, tension and alertness, and we will go on being vigilant.”
