UK banks still ‘resilient’ but BoE warns of ‘urgent need’ to address less regulated areas of finance sector
UK banks are “resilient” despite global banking turmoil, the Bank of England said today, but warned there was an “urgent need” for further rules in the less tightly regulated market-based finance sector.
Amidst volatility in the financial sector following Silicon Valley Bank’s collapse and the emergency acquisition of Credit Suisse by UBS, the Bank reaffirmed its belief in the strength of the UK financial system.
“The regulations in place for UK banks mean that they have significant financial resources to absorb shocks…We judge that UK banks are resilient and are strong enough to continue supporting households and businesses,” the Bank said.
Banks in the UK have a CET1 ratio far above the regulatory minimum. The CET1 ratio is a measure of a bank’s financial strength.
The countercyclical capital buffer – a ‘rainy day’ shock absorber – was maintained at two per cent, signalling confidence in the wider economy.
The Bank said it has been “closely monitoring” issues around the collapse of Silicon Valley Bank and Credit Suisse. It confirmed UK banks have “no significant exposures” to them.
While the traditional sector looked resilient, the Bank said there was an “urgent need to increase resilience” in market-based finance.
Market based finance, which includes the so-called shadow banking sector, is the system of markets, non-bank financial institutions and infrastructure which provides financial services to support the wider economy. It includes hedge funds, pension funds and payment providers.
The report said the sector could be exposed to sharp movements in asset prices which, in turn, could impact the wider financial sector. The Bank highlighted hedge funds who experienced “material losses” in bets placed on the US Treasuries market when yields fell sharply.
“UK authorities are working to reduce vulnerabilities domestically where effective and practical,” the Bank confirmed.
Alongside much tighter rules on liability driven investment (LDI) funds, the Bank said it was necessary to increase the resilience of money market funds. Money market funds invest in highly liquid, short-term assets.
The Bank said money-market funds should be “resilient to outflows at least as large as those seen in the dash for cash and LDI stress events”. The bank will launch a consultation paper on money market funds later this year.
Concerns about market-based finance have been rising up the agenda in recent years as higher interest rates has put pressure on the under-regulated sector.