Markets Are Testing Banks To Identify Weaknesses, Bank Of England Chief Warns

As the market continues to test out banks to find weaknesses, Bank of England Governor Andrew Bailey pledged to be very vigilant.

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Since Silicon Valley Bank collapsed earlier this month - the largest bank failure since the financial crisis - and Swiss rival UBS rescued Credit Suisse, global banking stocks have taken a beating.

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U.S. authorities are addressing particular issues regarding regional banks — Bailey told the U.K.’s Treasury Select Committee — and Credit Suisse was an “institutional story” — but he added that the U.K. banking system is "strong in terms of liquidity and capital."

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Due to Deutsche Bank's return to consistent profitability, along with its robust capital and liquidity position, analysts were confounded at Friday's sharp drop in European banking shares led by the German lender.

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A large chunk of the assets of failed Silicon Valley Bank was bought by First Citizens on Monday, helping Deutsche to lead gains as the market panic subsides.

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According to Bailey, the sharp market movements at the tail end of last week were an attempt to test out firms at the end of last week, especially Friday.

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“According to my estimate, they do not primarily depend on identifying weaknesses, but rather on testing, since quite a bit of testing is happening at the moment.”

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There are some differences between U.S. and U.K. regulations when it comes to how interest rate risk is dealt with in the banking book (IRRBB). According to Bailey, the British system was not as exposed to adverse interest rate movements as were the regional banks in the U.S. This is because interest rate risk is a prospective risk to bank capital and earnings.

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In recent months, the U.S. Federal Reserve and other central banks around the world have pushed interest rates upwards aggressively in order to meet the goals of reining in soaring inflation, putting some banks' bond portfolios at risk due to tightening monetary conditions.

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According to Bailey, the forced sale of Credit Suisse was also attributed to "idiosyncratic" features of the company that would not trigger stress in the U.K. banking sector, in line with market consensus within Europe.

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In the current market environment, the markets are searching for weak points in order to make money. In response to a question about whether the banking system had reached its nadir by the end of the crisis, Bailey said: “I don’t think that we are in the same place as we were in 2007/8, we’re in a very different place from then, but we have to be vigilant.”

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We are in a period of very heightened tension and alertness, and it’s certainly one in which we will continue to be vigilant. So if I give you the answer that ‘no, I don’t believe there is a problem moving forward,' I don’t want to give you the impression that we are not being vigilant. We are in a period of very heightened tension and alertness, and we will remain vigilant."