Bailey warns bank runs can snowball faster than before

Disastrous bank runs can snowball ‘much more quickly’ than before as customers swap messages and withdraw funds instantly, Bank of England Governor Andrew Bailey has warned.

He said the speed of the collapse of America’s Silicon Valley Bank (SVB) raised questions about how much money lenders should hold to guard against such a rout.

But he played down fears for a wider breakdown in the financial system, saying reforms to bank regulations since the crisis of 2008-09 ‘have worked’.

‘I do not believe we face a systemic banking crisis,’ Bailey said during a speech in Washington, while at the spring meetings of the International Monetary Fund.

The demise of SVB last month precipitated a worldwide shock that sent some bank stocks into free fall. 

Snowball effect: Bank of England governor Andrew Bailey said the speed of the collapse of Silicon Valley Bank raised questions about rules on how much money lenders needed to hold

It claimed the scalps of three US lenders, including SVB, while its biggest victim was 167-year-old Credit Suisse, forced into an emergency takeover by rival UBS.

The collapse of SVB became inevitable when customers pulled more than £30billion in deposits in 24 hours. 

Its UK subsidiary suffered a similar demise, losing £2.9billion in a day – Friday, March 10 – before the Bank of England engineered an emergency takeover by HSBC over the following weekend.

Bank runs can be catastrophic because banks do not normally hold enough money to pay out all customer deposits in one go.

Instead, lenders must carry out a balancing act of having enough ‘liquidity’ – cash, or assets that can be quickly turned into cash – on hand to pay out when needed.

Panics over lenders have been characterised over the years by customers queuing around the block to take cash out. 

But the SVB episode saw depositors sharing anxious messages on WhatsApp and pulling funds instantly, using online accounts.

That might mean banks and regulators need to rethink how much cash lenders need to hold to guard against future runs.

Bailey said major UK banks currently hold a total ‘liquidity buffer’ of £1.4trillion.

‘We can’t assume that the current answer on the total size of liquidity protection is the correct one,’ he said.

‘We saw with SVB 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.’

However, he cautioned that forcing banks to hold bigger cash buffers could hurt their ability to lend money, dragging on growth.

Markets have returned to relative calm since UBS’s rescue of Credit Suisse and Britain’s lenders appear for now to have gone relatively unscathed.

Analysts have said that major UK banks were generally well insulated from the fall-out after they were forced to behave more cautiously after the 2009 crisis. 

Bailey said: ‘When I look at the UK banks, they are well capitalised, liquid and able to serve their customers and support the economy.’

This post first appeared on Dailymail.co.uk