Saturday, June 3, 2023

‘Be very vigilant’: Bank of England chief says the market is testing banks to identify weakness

Andrew Bailey, Governor of the Bank of England, attends the Bank of England Monetary Policy Report Press Conference, on the Bank of England, London, Britain, February 2, 2023. 

Pool | Reuters

LONDON — Bank of England Governor Andrew Bailey on Tuesday vowed to be “very vigilant” amid ongoing volatility and prompt that the market is “testing out” banks to seek out weaknesses.

Global banking shares have taken a beating in March, as contagion fears unfold following the collapse of U.S.-based Silicon Valley Bank — the most important financial institution failure because the monetary disaster — and the emergency rescue of Credit Suisse by Swiss rival UBS.

Bailey informed the U.Ok.’s Treasury Select Committee that U.S. authorities are coping with explicit points referring to regional banks stateside, and that Credit Suisse was an “institutional story” — however affirmed that the U.Ok. banking system is “in a strong position capital and liquidity-wise.”

Friday noticed a sharp sell-off of European banking shares led by Deutsche Bank, which confounded many analysts, given the German lender’s return to constant profitability, together with its sturdy capital and liquidity place.

Deutsche recovered partially on Monday to steer beneficial properties because the market panic appeared to subside, after First Citizens agreed to buy a large chunk of failed Silicon Valley Bank’s assets.

“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 informed 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.”

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Bailey identified to variations between U.S. and U.Ok. rules within the remedy of rate of interest threat within the banking e book (IRRBB) — which refers to potential dangers to financial institution capital and earnings from hostile actions in rates of interest — as a key motive why the British system was not as uncovered as had been U.S. regional banks.

The Bank of England revealed final week that it warned U.S. regulators of the mounting dangers at SVB previous 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 mentioned it warned the agency and the San Francisco Federal Reserve of this threat and of “overlap of clients on the asset and liability side of the balance sheet” of SVB UK.

The U.S. Federal Reserve and different central banks all over the world have hiked rates of interest aggressively over the previous 12 months, in a bid to rein in hovering inflation, and tightening financial circumstances have left some banks’ bond portfolios uncovered.

Bailey additionally echoed market consensus that, inside Europe, the pressured sale of Credit Suisse was brought on by “idiosyncratic” options that might not trigger stress within the U.Ok. 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 in 2007/8, we’re in a very different place to then, but we have to be very vigilant,” Bailey mentioned in response to a query about whether or not 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.”

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