The Bank of England maintains that the UK banking system is robust, but admits that any “lasting impact” on banks ‘ financing costs could erode the country’s financial stability.
This follows the bankruptcy of the American Silicon Valley Bank and Signature Bank, after they were unable to raise the necessary funds to pay savers who quickly withdrew money from the banks.
The SVB’s UK operations were rescued earlier this month by HSBC Holdings PLC via a sale costing just £ 1.
In a letter to the Treasury Committee, the bank’s Governor, Andrew Bailey, stressed that the UK remains separate from the banking problems in the US.
Bailey said: “the loss of confidence in, and significant outflow of deposits at, the UK SVB was ultimately due to the problems of the US parent.
“The UK banking system remains resilient, with robust capital and a strong liquidity position.”
Bailey pointed out that UK banks are less dependent on certain bonds than US banks and have a more diverse group of depositors, unlike the SVB, which mainly lends to the technology and innovation sector and has a large portfolio of long – term bonds.
He added: “the direct exposure of UK banks and insurers to other US regional banks is negligible. SVB was the only US regional bank with a footprint in the UK.”
Still, the bank warned that more volatility in financial markets, particularly the recent sharp drop in banks ‘ share prices, could reveal weaknesses in the UK financial system.
The letter reads as follows: “there remain channels through which UK financial stability can be affected, including a lasting effect on bank financing costs and the possibility that these will increase the cost of borrowing for UK households and businesses.
“And if the increased market volatility and sharp movements in asset prices continue, this could lead to the crystallization of vulnerabilities in market financing previously identified by the Financial Policy Committee.”
The collapse of the SVB and broader banking problems make clear the importance of banks being well capitalized against the risks of changing interest rates, Bailey said.
The Bank’s monetary policy committee will make its final interest rate decision on Thursday.
