UK Markets closed

Bank of England scrambles to assess risk of new financial crisis

Bank of England - Peterspiro
Bank of England - Peterspiro

The Bank of England has ordered British lenders to disclose their exposure to global debt markets amid a race to prevent contagion after the industry's most turbulent week since the 2008 financial crisis.

Officials at Threadneedle Street last week held talks with large and small banks, assessing their risk profiles and asking for a breakdown of their investments in bond markets as chaos engulfed Credit Suisse and a string of US lenders.

The talks also covered any direct UK exposure the banks had to the embattled Swiss lender, which is understood to be minimal.

It comes as regulators in the US and Europe attempt to stem a growing crisis in the banking industry.

In Switzerland, senior executives at Credit Suisse were holding crisis meetings over the weekend to plot a merger with UBS as it struggles to regain confidence from investors.

Despite Switzerland's central bank stepping in on Thursday to make $54bn (£44.5bn) available to Credit Suisse in a bid to stabilise the situation, its shares fell a further 8pc on Friday.

Shares in the bank sank by more than a quarter last week.

In the US, shares in the regional lender First Republic Bank tanked by a third on Friday despite a group of Wall Street giants propping up the crisis-hit Californian lender with a $30bn cash injection.

The trigger for the current crisis was the collapse of Silicon Valley Bank (SVB), which went bust after its bets on government bonds turned sour following a rise in interest rates.

The bank revealed that it lost $1.8bn on the sale of a portion of its bond portfolio, forcing it to try and raise fresh capital, which spooked depositors who rushed to take out their cash out of the bank.

Regulators in the UK have been scrambling to determine whether British lenders could fall foul of similar bets, which led to Bank of England officials approaching UK banks last week.

It is understood that the intervention was a precautionary measure to check that lenders remain in robust health, and did not reveal any immediate threats to the UK financial system.

City sources said the system is far stronger than in 2008 and there is widespread confidence that lenders of all sizes can weather the present disruption comfortably.

However, the unusual intervention highlights the level of concern triggered by the failure of SVB and the issues at Credit Suisse.

City sources said the credit departments of large UK banks had been closely liaising with Threadneedle Street and the City watchdog.

They added that a smaller lender had received a number of information requests from the Bank’s Prudential Regulation Authority (PRA), including a breakdown of their exposure to bond markets.

Around $466m has been pulled out of  Credit Suisse's European and US managed funds in recent days, according to data from Morningstar.

Ulrich Koerner - Hollie Adams/Bloomberg
Ulrich Koerner - Hollie Adams/Bloomberg

A source at one rival bank in the City said clients were pulling money from Credit Suisse “like you wouldn't believe”.

The source added: “The loan from the Swiss National Bank has helped calm the panic of default but clients there are still very scared.”

The Swiss national bank and regulator Finma are now racing to secure a deal with UBS before markets open on Monday, with the Bank of England and US authorities involved in talks about how a new legal structure would look.

It is feared that failure to reach a deal will lead to a further steep fall in the Credit Suisse share price. Deposit outflows from the bank topped Sfr10bn (£8.9bn) a day late last week as fears for its health mounted, sources told the Financial Times.

Ulrich Körner, Credit Suisse’s chief executive, said last week: “These measures we have taken demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders.

“My team and I are resolved to move forward rapidly to deliver a simpler and more focused bank built around client needs.”

The Bank of England declined to comment.