Andrew Bailey has criticised the US handling of the banking crisis and warned further turmoil poses a threat to the British economy.
In a letter to MPs, the Bank of England governor warned a ‘blanket guarantee’ of bank deposits was ‘not costless’ and could result in ‘moral hazard’.
This is where banks or customers take undue risks because they know they are protected if anything goes wrong.
In a letter to MPs, the Bank of England governor Andrew Bailey (pictured) warned a ‘blanket guarantee’ of bank deposits was ‘not costless’ and could result in ‘moral hazard’
Bailey said while the UK financial system was ‘safe and sound’ in the face of chaos in the US and Europe, Britain would not be immune to developments overseas.
The global banking system has been rocked by the collapse of three US lenders – including Silicon Valley Bank (SVB) – as well as the implosion of Credit Suisse in Europe and its rescue by UBS.
US regulators guaranteed all money customers held at SVB, rather than the $250,000 (£200,000) usually covered. In the UK, deposits of up to £85,000 are covered.
Asked by MPs if he was concerned by the US approach, Bailey said: ‘A blanket guarantee of all depositors is not costless.
‘It reduces the risk sensitivity of a bank’s funding, could result in moral hazard, and any costs would ultimately need to be borne by the taxpayer.
‘The UK deposit guarantee limit is set at a level which balances financial stability, moral hazard and adequate depositor protection.’
Bailey said £2.9billion was pulled out of the UK arm of SVB in one day this month, some 30 per cent of the firm’s deposits, before a rescue by HSBC was organised.
He said strains affecting global banks could still hurt Britain’s economy, through higher borrowing costs.
