Bank of England Governor Andrew Bailey attends the press conference on the Bank of England Monetary Policy Report at the Bank of England, London, Britain, 2 February 2023.
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LONDON — Bank of England Governor Andrew Bailey on Tuesday vowed to be “very vigilant” amid ongoing volatility, suggesting the market is “trying out” banks to find weaknesses.
Global bank stocks took a hit in March as contagion fears spread following the collapse of US-based Silicon Valley Bank – the biggest bank failure since the financial crisis – and the emergency rescue Swiss credit from the Swiss competitor UBS.
Bailey told the UK Treasury Select Committee that US authorities are looking into certain issues related to regional banks in the States and that Credit Suisse has “institutional history” – but reiterated that the UK banking system “is in a strong capital – and liquidity position” is .”
There was a sharp sell-off in European bank stocks on Friday, led by Deutsche Bankwhich puzzled many analysts given the German lender’s return to steady profitability and its robust capital and liquidity position.
The German rebounded partially on Monday, leading gains as market panic appeared to abate after First Citizens agreed to buy a large chunk of Silicon Valley Bank’s failed assets.
“I also think what we saw at the end of last week, especially on Friday, when there were pretty sharp market moves [were] moves in the markets to test firms if you want to,” Bailey told lawmakers.
“I’m not saying that in my estimation these are based on identified weaknesses more than testing, I mean there’s quite a bit of testing going on at the moment.”
Bailey pointed to differences between US and UK regulations in the treatment of interest rate risk in the banking book (IRRBB) – which refers to potential exposure to bank capital and returns from adverse interest rate movements – as the main reason the UK system was not as exposed as US -Regional banks.
The Bank of England announced last week that it had warned US regulators of the mounting risks ahead of the SVB collapse, noting that its Prudential Regulation Authority “understood that SVB UK faced a concentration risk, because it made loans and took deposits, it had the same relatively concentrated customer base in the innovation sector.” It said it protected the company and the San Francisco Federal Reserve from that risk and an “overlap of customers on the asset and liability side of SVB UK’s balance sheet.” warned.
The US Federal Reserve and other central banks around the world have raised interest rates aggressively over the past year to curb rising inflation, and tightening monetary conditions have put some banks’ bond portfolios at risk.
Bailey also reiterated the market consensus that the forced sale of Credit Suisse within Europe was caused by “idiosyncratic” features that would not weigh on the UK banking system.
“The markets are trying to find weaknesses at the moment. I think we’re not at all where we were in 2007/08, we’re in a very different place than we were then, but we have to.” be very vigilant,” Bailey replied when asked if the banking system was out of the woods now.
“So when I give you the answer, ‘I don’t think there’s a problem going forward,’ I don’t want to give you the idea for a moment that we’re not very vigilant, because we are. We are in a period of frankly very heightened tension and alertness, and we will continue to be alert.