Bank of England on high alert as investors ‘test’ banks

Bank of England governor Andrew Bailey has said investors are hunting for “points of weakness” in banking, as fears linger that the crisis in the sector could engulf more lenders.

On Monday, European bank shares rose, boosted by news that First Citizens Bank in the United States would buy most of the assets of Silicon Valley Bank, which collapsed earlier this month. But the rise followed a sharp selloff on Friday, which was led by Deutsche Bank (DB).

“I think there are moves in markets to, if you like, test out firms,” Bailey told a UK parliamentary committee Tuesday. “I would not want to say that those in my estimation are based on identified weakness.”

He later added: “Markets are trying to find points of weakness at the moment.”

Regulators and investors on both sides of the Atlantic are on edge about potential pockets of vulnerability in the banking sector.

José Manuel Campa, the head of the European Banking Authority, told Germany’s Handelsblatt Monday that European lenders remained vulnerable. “The risks in the financial system remain very high,” he said.

Bailey said the central bank was keeping a close watch on the banking sector, despite his “very strong view” that UK lenders were in a strong position.

“I don’t think we’re at all in the place we were in in 2007/2008… but we have to be very vigilant,” he said. “We are in a period of very heightened, frankly, tension and alertness.”

UK lawmakers questioned Bailey and other Bank of England officials about events surrounding the failures of SVB and Credit Suisse. The Swiss heavyweight was rescued by UBS, while SVB UK was bought by HSBC (HBCYF) for £1 after its US parent was shut by regulators.

Bailey said the speed of SVB UK’s collapse had taken him by surprise. “In my experience, which goes back 30 years now, it’s probably the fastest passage from health to death since Barings. Barings was a sort of Friday-to-Sunday thing, and this was pretty similar,” he said.

Barings Bank collapsed in 1995 after more than $1 billion was lost by a single rogue trader, Nick Leeson.

Despite being well-capitalized, SVB UK would not have survived the demise of its US parent, according to Bailey. He said the Bank of England had continued to prepare for its insolvency until the sale to HSBC was finalized.

Sam Woods, deputy governor for prudential regulation at the Bank, told the parliamentary committee that he had been in “intensive discussions” with the Federal Reserve and Switzerland’s financial regulator Finma since October over contingency plans for embattled Credit Suisse.

Later on Tuesday, US lawmakers will begin their investigation into the collapse of SVB and Signature Bank, with financial regulators testifying before the Senate banking committee. US regulators will then appear before the House financial services committee on Wednesday.