Bank of England Governor Andrew Bailey has said the UK financial system is at a time of “great tension and alarm” for further disruptions in the banking sector.
The UK banking system is still in a “strong position” but the central bank needs to be “very vigilant”, Bailey told the Finance Committee in the House of Commons on Tuesday.
Central bank governors faced questions from parliamentarians amid heightened global tensions following the collapse of US Silicon Valley Bank (SVB) and Swiss authorities’ emergency bailout of Credit Suisse.
Following the Bank of England’s 11th consecutive rate hike, there was concern that higher interest rates could put pressure on lenders.
Bailey said the central bank was “very vigilant” but stressed that the UK banking system is in a different situation than it was during the global financial crisis 15 years ago.
He told MPs:
“We are in a period of great tension and caution, and we will continue to do so.”
The collapse of SVB, the 16th largest bank in the United States, is the largest bank failure since Washington Mutual during the 2008 financial crisis.
The group’s UK arm was sold to HSBC in a bailout deal, and the shock of the failure rocked global financial markets.
After the collapse, Chancellor of the Exchequer Jeremy Hunt said there was “no systemic risk” to the UK’s financial system, but there were “significant risks” to the UK’s technology and life sciences sector.
Bailey told MPs the SVB bankruptcy came after trader Nick Leeson hid as much as £827m in losses on approved trades in 1995, costing the business huge losses. He said it was the fastest bankruptcy since the failure of British merchant bank Barings Bank.
The Governor said:
“My very strong view of the UK banking system is that it is in a strong position both in terms of capital and liquidity. ”
Bailey added that he had proved to parliamentarians that the UK was experiencing a tightening of credit terms, hinting that this could influence future decisions on interest rates.
“We have seen some evidence that credit conditions are tightening, but we have not seen any significant progress on that front. We will always take credit conditions into account when setting monetary policy,” he said.
US Treasury Secretary Janet Yellen has suggested that the US government will protect people’s savings if another smaller lender like SVB fails.
In a speech at the National Bankers Association on March 21, Yellen said more steps would be taken to protect bank depositors if the smaller institutions that threatened the country’s financial stability were hit by further bank runs. said to be taken.
Commenting on the move, the Governor of the Bank of England said: make that decision.
“I agree with what Janet Yellen said. This is not what should be the norm and all deposits are insured.”
He added that it may be difficult to strike a balance between stopping “bank crackdowns” from happening by offering to protect savings and preventing deposit guarantees from becoming the norm.
“I don’t want to criticize the US authorities for a moment because I think they have dealt with a very difficult situation,” he said.
No attractive options
Finance Committee MPs also questioned bank bosses about the £2.6bn sale of Credit Suisse.
Credit Suisse has been in trouble for years, but the market turmoil caused by SVB’s failure pushed it over the edge a week ago.
Swiss investment bank UBS later announced it would buy Credit Suisse in a deal worth more than $3 billion.
Sam Woods, deputy governor of the Bank of England and chief executive of the Prudential Regulation Authority, met with MPs on Tuesday, and the central bank has been discussing Credit Suisse instability with other authorities since last fall. said it came.
“Since October, the Federal Reserve Board, the Swiss authorities and we have been present to discuss the real situation,” he said.
“We were talking, ‘What if we get stuck?’ It was very helpful that weekend.
“At the end of the day, like Silicon Valley, there weren’t any compelling options, but there were options nonetheless.”
PA Media contributed to this report.