Bailey warns that bank runs could snowball faster than before as customers can exchange messages and withdraw funds instantly
Disastrous bank runs could snowball ‘much faster’ than before as customers exchange messages and withdraw funds immediately, Bank of England governor Andrew Bailey warned.
He said the speed of the US Silicon Valley Bank (SVB) collapse raised questions about how much lenders would have to hold on to protect against such a defeat.
But he downplayed fears of a broader financial system collapse, saying banking regulatory reforms since the 2008-2009 crisis have “worked.”
“I don’t believe we are facing a systemic banking crisis,” Bailey said during a speech in Washington at the spring meetings of the International Monetary Fund.
The demise of SVB last month triggered a global shock that sent some banking stocks into a free-fall.
Snowball effect: Bank of England governor Andrew Bailey said the speed of Silicon Valley Bank’s collapse raised questions about rules on how much lenders had to hold
It claimed the scalps of three US lenders, including SVB, while the biggest victim was 167-year-old Credit Suisse, forced into a bailout by rival UBS.
SVB’s collapse became inevitable as clients raised more than £30bn in deposits within 24 hours.
The UK subsidiary suffered a similar downfall, losing £2.9bn in one day – Friday 10 March – before the Bank of England brokered an emergency takeover by HSBC the following weekend.
Bank runs can be catastrophic because banks do not normally hold enough cash to pay off all customer deposits at once.
Instead, lenders must perform a balancing act by having enough “liquidity”—cash or assets that can be quickly converted to cash—on hand to disburse when needed.
Panic over lenders has been characterized over the years by customers queuing up to withdraw money.
But in the SVB episode, savers shared fearful messages on WhatsApp and immediately withdrew money using online accounts.
That could mean banks and regulators need to rethink how much cash lenders should hold to protect against future runs.
Bailey said major UK banks currently have a total ‘liquidity buffer’ of £1.4 trillion.
“We cannot assume that the current answer to the overall size of liquidity protection is the right one,” he said.
‘We saw at SVB that with the technology we now have – both in terms of communication and speed of bank account access – runs can go much faster.
That raises the question of what appropriate and desirable liquidity buffers are that create time to take action to solve the problem.’
However, he warned that forcing banks to maintain larger cash buffers could erode their ability to borrow money, slowing growth.
Markets have returned to relative calm since UBS’s bailout of Credit Suisse and UK lenders appear relatively unscathed for now.
Analysts have said major UK banks were generally well insulated from the fallout after being forced to act more cautiously after the 2009 crisis.
Bailey said: ‘When I look at UK banks, they are well capitalised, liquid and able to serve their customers and support the economy.’