The Bank of England’s governor has said it is on high alert and will remain “vigilant” to further turmoil after the collapse of Silicon Valley Bank, noting it was the fastest demise of a lender since Barings Bank in the mid-1990s.
Andrew Bailey told MPs on the Treasury select committee it had been decades since a lender had gone from “health to death” within a matter of days, saying that Barings – which was brought down by the rogue trader Nick Leeson – was the only worthwhile comparison to what happened to the US tech lender.
While he denied that the financial sector was heading towards a fresh crisis, he said recent market turmoil had been “testing” the banking sector for signs of weaknesses, and gave an assurance that regulators were alive to the potential risks.
“I don’t think we are at all in the place we were in in 2007 … but we have to be very vigilant,” Bailey said. “I don’t think there’s a problem going forward, [but] I do not want to give you, for a moment, the idea that we are not very vigilant, because we are in a period of very heightened, frankly, tension and alertness.”
Bailey’s remarks came after what he said was one of the swiftest bank failures in living memory.
“In my experience, which goes back 30 years now, [the collapse of SVB was] probably … the fastest passage from sort of health to death, really, since Barings,” Bailey said. Barings, he explained, “was a sort of Friday to Sunday thing, and this was pretty similar”.
Barings Bank, which was the City’s oldest merchant bank, collapsed in 1995, when Leeson ran up huge losses after concealing as much as £827m in unauthorised trading positions. Barings was bought by Dutch bank ING for a nominal sum of £1, though much of its assets were later sold off.
SVB, which was the 16th largest lender in the US, collapsed on 10 March this year, after failing to raise emergency funding to plug a multibillion-pound shortfall in its finances. The US bank, which was an important lender to the tech industry and venture capital investors, was struggling to keep up with an increase in withdrawals from customers who had seen funding dry up in recent months.
Fears over its health prompted a severe drop in its shares, spooking customers and causing a run on the bank, which was seized by US authorities.
What is left of SVB’s US parent company is being taken over by First Citizens, a North Carolina lender, though its collapse will cost $20bn (£16bn) in deposit insurance payouts. Meanwhile, its UK subsidiary was bought for £1 by HSBC in an emergency deal arranged by the Bank of England and Treasury.
Bailey said this contrasted with Credit Suisse, which was sold to its larger rival UBS through a Swiss government-orchestrated emergency takeover a week later. Credit Suisse’s problems, he explained, were “actually a much more drawn-out affair”.
Credit Suisse had been struggling to keep customers and turn profits after a prolonged series of scandals, compliance problems and bad financial bets.
Bailey said regulators had been well aware of the cocktail of problems at Credit Suisse, and had prepared for its potential demise and an orderly wind-down of its UK operations.
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“We’ve taken a lot of steps over the years to get the UK operations in a place where we thought we could deal with it if we needed to … and so that has been very high priority for us going back … a decade almost,” the governor explained.
While Swiss regulators have faced criticism for wiping out special bonds while protecting shareholders in the UBS takeover, Bailey said he understood that those bonds came with a special clause “which allows this contractual wipeout”. He said UK banks did not issue bonds with these clauses.
Despite concerns about the government’s deregulation drive, the Bank deputy governor and head of the Prudential Regulation Authority, Sam Woods, said there was no reason to halt changes to certain rules such as ringfencing, which are meant to protect and separate everyday deposits from investment banking operations, as long as they were relatively small tweaks.
However, he suggested there could be further tightening of some rules. Woods said the Bank of England would look at whether the concentration of deposits from certain sectors at individual banks were at risk, and how technology had increased the speed at which a bank run can take place. “We’re going to have to look at all of that for sure,” Woods said.
Bailey reiterated concerns over the US decision to guarantee all deposits at SVB. While he said he understood the US was under pressure, he added: “I would not support … the idea that 100% deposit guarantees become the norm.”
The governor stressed that regulators were not in the business of protecting banks from failing: “We do not operate a no-failure regime, because that would have all sorts of consequences.”