BoEs Bailey says bank reforms worked but questions about liquidity buffers

(Reuters) – Bank of England Governor Andrew Bailey said bank reforms enacted after the global financial crisis of 2007-09 worked during the recent banking turmoil, but there were questions about whether banks should set aside bigger cash buffers in future.

The failure last month of Silicon Valley Bank and two other lenders in the United States, along with the forced takeover of Credit Suisse by UBS sent banking shares globally into a tailspin, but markets have since calmed.

Regulators have said the episode represented the first big test of the tougher banking rules that were brought in after the global financial crisis.

“The post-crisis reforms to bank regulation have worked,” Bailey said in a speech on Wednesday to the Institute of International Finance in Washington where he is attending International Monetary Fund meetings.

“Today 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.”

Bailey, however, echoed calls from his predecessor Mark Carney by saying there might be questions over the size of liquidity buffers required of banks in order to tide them over short-term shocks.

“We cant assume that, going forwards, the current answer on the total size of liquidity protection is the correct one,” he said.

“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.”

Bailey said future size and make-up of banks liquidity buffers would influence how far central banks go in reducing the size of the bond holdings they have acquired since the financial crisis and which grew further during the coronavirus pandemic.

“We dont know yet where central bank balance sheet reduction will need to stop in terms of the necessary level of reserves,” he said.

(Reporting by Huw Jones; Writing by William Schomberg)