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Markets are testing banks for weakness: BOE


Bank of England (BOE) Governor Andrew Bailey said global markets are testing “quite a lot” of the banking sector for any signs of trouble after the failure of Silicon Valley Bank (SVB) and the rescue of Credit Suisse Group AG.
While the UK banking system remains in a “very strong position,” Bailey said the past weeks brought “moves in markets to, if you like, test out firms.”
“I would not want to say that those in my estimation are based on identified weaknesses,” Bailey told the UK’s Treasury Committee in Parliament on Tuesday.
Bank shares have swung wildly in recent days along with concern about the health of the financial system. The BOE in its role as banking regulator is attempting to identify risks to the economy and defuse those.
The UK central bank stepped when SVB Financial Group, the parent of Silicon Valley Bank, failed in the US. The British unit of SVB was sold to HSBC Holdings Plc in the early hours of March 13.
Bailey described SVB’s collapse as “the fastest passage from health to death, really, since Barings” in 1995. He’s concerned that regulators must act more quickly to either prop up or start a resolution to failing institutions in the age of social media, when rumours can spread more rapidly and lead to digital bank runs.
In a speech, Bailey said officials need to learn lessons from SVB because of the “speed at which runs can take place” given the technological advances since the financial crisis.
“It is striking that that happened very quickly — word gets around,” he said in response to questions after a speech at the London School of Economics. “This is very different from the Northern Rock-style queue outside the branch type thing.”
The UK may have to consider forcing banks to hold more liquid assets so they can meet rapid demands for withdrawals that can now happen electronically, Sam Woods, chief executive of the Prudential Regulation Authority, told the same committee.
However, the stress on the banking sector in recent weeks has shown the UK’s overall oversight is robust, Woods said. The BOE, the Federal Reserve and Switzerland’s Finma have worked closely together since October on contingency plans for Credit Suisse, Woods and Dave Ramsden, BOE deputy governor, told the hearing.
The officials also defended the move to sell SVB UK to HSBC, even though the deal exempted HSBC from ring-fencing rules so the bank could house all of SVB UK’s clients inside its retail lending division.
That waiver should not be used as a precedent, according to Woods. “I think we should resist other banks coming along and kicking further holes in the fence without that extreme situation,” he said.
Bailey said he was sympathetic to the position of US Treasury Secretary Janet Yellen, whose comments about protecting deposits in failing banks rattled markets. Striking a balance between maintaining confidence and avoiding blanket guarantees is “remarkably hard,” Bailey said. But “I would not support 100% guarantees,” he added.

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