Five of Britain’s biggest banks were today instructed to improve their readiness for failure after the sudden demise of major financial institutions last year highlighted the speed with which they can collapse. The Bank of England today named Barclays, HSBC and Lloyds among firms that needed to strengthen their preparedness for failure, warning they must be “sufficiently flexible and able to produce timely and robust estimations of their liquidity needs in a resolution, given the speed at which events can evolve, for example due to rapid deposit outflows.”
The scale of the risks latent within the banking sector was revealed last year by the rapid collapse of Credit Suisse and Silicon Valley Bank (SVB), which sent shockwaves through financial markets. Within a day of SVB’s warning that it needed a capital raise, the firm’s share price sunk 60% and as much as $40 billion or nearly a third of its deposits had been withdrawn, with a further $100 billion on course to leave. The UK arm of SVB was acquired shortly thereafter in a last-minute rescue deal by HSBC, while Credit Suisse was merged with UBS.
A subsequent report from the UK’s Financial Stability Board found “in today’s environment…money can flow out of institutions with incredible speed in response to information or misinformation amplified through social media channels.”
“Whilst the core problems of the banks themselves may be different once a bank run has gathered pace, it becomes extremely challenging to halt outflows,” the report said.
“This run on deposits at SVB appears to have been fuelled by social media and SVB’s concentrated network of venture capital investors and technology firms that withdrew their deposits in a coordinated manner with unprecedented speed.”
As part of the Bank of England’s resolvability assessment, which tests institutions’ preparedness to restructure, it asked banks to provide a liquidity analysis within 24 hours in response to a hypothetical failure scenario, in a marked speeding up of its requirements compared to previous assessments.
In its assessment the Bank concluded:
- Barclays did not adequately show it could produce valuations “in a timely manner”;
- HSBC needed to improve its ability to produce equity valuations;
- Lloyds was unable to produce asset and liability valuations “in sufficient detail”;
- Standard Chartered did not show it could produce “sufficiently robust valuations” in resolution.
The Bank also said Barclays did not identify its restructuring options “in enough detail to evidence they are credible” while Virgin Money needed to show its “capabilities would operate together” in the event of failure. No material issues were identified for Nationwide, Santander and NatWest.
The Bank of England also singled out Standard Chartered as the only major UK bank with a ‘shortcoming’ in its preparations for failure, warning that its ability to evaluate options for restructuring was inadequate. It added that all major banks had improved their capabilities relative to its previous assessment in 2022, and that it would postpone date of the next assessment.
Alastair Morley, Deloitte's lead partner on resolution, said: “Since the last public disclosures in 2022, the industry has shown that it has made further progress. Real life events have demonstrated the need for banks and building societies to be resolved in a timely and robust manner to ensure the stability and continuity of the whole financial system.
“However, as the Bank of England has indicated, there is still work to be done. The largest and most complex firms remain just that, and we expect a renewed focus and appetite for continued work to enhance the resilience of them.”
