Risky Business: Bank of England Chief Advises Vigilance

Following the dual failures of Silicon Valley Bank and Credit Suisse, the market is “testing out” banks to discover weaknesses, Bank of England Governor Andrew Bailey told his country’s Treasury Select Committee in late March.

Global banking stocks fared poorly after SVB’s collapse and UBS’ emergency takeover of Credit Suisse. The week of SVB’s failure led to the S&P 500 Banks Index plunging ~11% by market close Friday while the KBW Bank Index hit its lowest level since 2020 during the height of the COVID-19 pandemic.

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Bailey advised banks to be “very vigilant,” CNBC reported, and said that the UK’s banking system is “in a strong position capital and liquidity-wise.”

He noted differences between UK and US regulations regarding interest rate risk as a reason why US regional banks were more exposed than UK banks.

The Bank of England said that it had warned US regulators of possible risks at SVB before its collapse. 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,” according to CNBC.

Also, the bank said it had alerted the San Francisco Federal Reserve of the risk and the “overlap of clients on the asset and liability side of the balance sheet” of SVB UK.

Bailey cited “idiosyncratic” reasons for the rescue of Credit Suisse, saying that it would not stress the UK banking system. “We are in a period of very heightened, frankly, tension and alertness, and we will go on being vigilant,” he told the Treasury Committee, CNBC reported.