Lessons learnt again, there's no escape.3 Apr 2023 09:56
Banks are the Achilles heel of the market economy. The combination of risky long-term assets with liquid liabilities redeemable at par is a standing invitation to illiquidity and insolvency. Contagion is also a permanent danger. The events of recent weeks have reminded us of these realities.
So, what lessons should be learnt, including in the UK? As Andrew Bailey, governor of the Bank of England has reminded the House of Commons Treasury Committee, “Banking is an international industry and the UK is a significant financial centre.” The UK wants to enjoy the benefits, while minimising the risks. What is, at least so far, a “mini” crisis is a reminder of the risks.
So, what are the obvious lessons?
First, an open financial entrepot like the UK is vulnerable to regulatory failures elsewhere. Thus, as Bailey stressed, it was helpful that Silicon Valley Bank UK was a ringfenced subsidiary, not a branch. That allowed the UK to resolve it quickly and independently.
Second, the story of Credit Suisse shows that policymakers may find it hard to impose orderly resolution on politically sensitive institutions, even when a plan for it exists. The UK authorities need to consider whether and how they would have done better in a similar case. Ring Fencing of the domestic retail bank did not avoid the problem in that case. That is disturbing.
https://www.ft.com/content/355bf40e-6666-4049-ab93-b7198540a4d2