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Banks 'may need more liquidity buffers' to cope with runs in future, BoE governor Andrew Bailey warns

Banks 'may need more liquidity buffers' to cope with runs in future, BoE governor Andrew Bailey warns

The Governor of the Bank of England said online technology risked speeding-up crises - but reaffirmed his conviction that there are no systemic problems.
Andrew Bailey has called into question whether UK banks have large enough cash buffers to cope with crises similar to the recent run on Silicon Valley Bank.

The Governor of the Bank of England (BoE) said last month's turmoil, which led to the rapid takeovers of the bank's US and UK arms, served as a warning that rushes to withdraw deposits can now go "further much more quickly" thanks to online technology.

The collapse of the bank sparked jitters across the globe, with UBS stepping in to save its Swiss rival Credit Suisse, while bank shares also slid, before markets later calmed.

Speaking at an event in Washington DC, Mr Bailey cautioned: "We can't assume that, going forwards, the current answer on the total size of liquidity protection is the correct one.

"We saw with Silicon Valley Bank that with the technology we have today - both in terms of communication and speed of access to bank account - runs can go further much more quickly.

"This must beg the question of what are appropriate and desired liquidity buffers that create the time needed to take action to solve the problem."

But he also reaffirmed his conviction that reforms introduced after the 2008 financial crisis had "worked", adding: "I do not believe we face a systemic banking crisis."

"When I look at the UK banks, they are well capitalised, liquid and able to serve their customers and support the economy," he added.

Mr Bailey acknowledged that requiring banks to hold larger buffers risked having an impact on economic growth.

He told his audience at the Institute of International Finance: "A common outcome of... increasing the broader liquidity buffers of banks and non-banks could be to create a constraint on lending and investment in the real economy.

"For the UK economy this would go against the need to finance investment to support stronger potential growth, from its current weak level."

And the governor said banks and non-banking financial institutions could not be expected to hold ever larger liquidity buffers to cover unforeseeable 'Black Swan' events, and said it was preferable for central banks to have tools to act with "temporary and targeted interventions".

Lessons to be learnt

Mr Bailey's comments on online technology come after his deputy Sam Woods told MPs on the Treasury Committee last month that banks needed to consider how easily deposits can be withdrawn electronically in seconds.

The governor later told a separate event, hosted by the International Monetary Fund, that he believed lessons could still be learnt from the recent turmoil - despite his insistence that there were no systemic issues - such as how to adapt to the speed and ease with which deposits could now be withdrawn.

"There are learning points from these issues that we have run into," he told an audience in Washington DC. "We will have to spend a lot of time thinking these things through."

Mr Bailey also reiterated he did not see the makings of another 2008 financial crisis as "the system is in a much more robust condition". And he added: "we've got a lot more tools in the armoury [now]".
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