Bank of England says it is on alert after turmoil in banking sector

By Iain Withers, William Schomberg and Sarah Young

LONDON (Reuters) -Bank of England officials said on Tuesday the central bank was on alert amid global turmoil in the banking sector but added that Britain was not experiencing stress linked to the demise of Silicon Valley Bank and Credit Suisse.

"We are in a period of very heightened, frankly, tension and alertness," BoE Governor Andrew Bailey told parliament's Treasury Committee in a question-and-answer session about the upheaval triggered by the recent banking failures.

"I don't think that any, and we've said this, that any of these features cause stress in the UK banking system," he said.

Markets have been roiled by the collapse of U.S. technology lender Silicon Valley Bank, followed by the failures of other U.S. regional lenders and the emergency rescue of Swiss lender Credit Suisse by rival UBS.

Deputy BoE Governor Dave Ramsden said the central bank had to "remain incredibly vigilant" after the turmoil.

"We'll keep a close eye on bank funding costs, what the consequences of those could be for households and businesses, equally looking out for other risk factors."

Bailey said the recent swings in the share prices of some banks showed investors were testing the sector.

"I think there are moves in markets to, if you like, test out firms," Bailey said.

The failure of SVB had been one of the swiftest he had ever seen, he added.

"The fastest passage from sort of health to death, really, since Barings actually," Bailey said, referring to the failure of British investment bank Barings Plc in 1995.

NO UNIVERSAL DEPOSIT GUARANTEES

The heightened concerns about the safety of banks globally have raised questions about how far authorities should go to shore up the sector if needed, particularly regional lenders in the United States.

U.S. Treasury Secretary Janet Yellen told lawmakers last week that regulators and the Treasury were prepared to make comprehensive deposit guarantees at other banks, as they did at failed Silicon Valley Bank and Signature Bank.

Customer deposits at licenced banks in Britain are guaranteed up to 85,000 pounds ($104,635).

Bailey said on Tuesday it should not be the norm for all bank deposits to be guaranteed. Doing so would itself run the risk of causing a bank run once any such guarantee was removed, he said.

The BoE had made contingency plans for Credit Suisse's British arm over many years, Bailey told the committee, adding that the Swiss group hit a "viability problem" in the days prior to its rescue as customers pulled out their cash.

"We have taken a lot of steps over the years to get ... the UK operation into a place where we thought we could deal with it if we needed to deal with it," Bailey said. "That's been a high priority for us going back a decade almost."

The central bank governor also said Britain would not treat additional tier one (AT1) bondholders in the same manner that they were in the emergency takeover of Credit Suisse by UBS.

Swiss regulators wrote down 16 billion Swiss francs ($17.4 billion) of Credit Suisse AT1 debt to zero, while protecting some value for shareholders.

"In any resolution we will always abide by the code of hierarchy because that's a cardinal principle," Bailey said.

Asked how the BoE would respond if the recent volatility threatened the supply of credit to Britain's economy, Bailey said the bank was prepared to lower the so-called countercyclical capital buffer imposed on lenders.

Bailey said the BoE had seen some evidence of tighter credit conditions but did not believe this was critical at the moment.

($1 = 0.8123 pounds)

($1 = 0.9177 Swiss francs)

(Reporting by Iain Withers and Sarah Young, Additional reporting by Kylie MacLellan, Editing by William Schomberg and Angus MacSwan)