The Bank of England (BoE) has insisted Britain’s financial system is “safe and sound” in an effort to calm nerves as markets prepare to reopen in the wake of the emergency sale of Credit Suisse to UBS.
Britain has so far avoided being drawn into the crisis that has seen two major US banks fold but the plight of Credit Suisse – one of only 30 banks considered to be large enough to sway the global financial system – has acted as a warning shot for the world economy.
Central banks around the world hailed the bank’s sale as a boost for global financial stability, but an agreement announced by the US Federal Reserve and partners on Sunday evening suggested there were fears more banks could need support in the coming weeks.
The turmoil in the sector means the BoE will be under close scrutiny on Thursday when the Monetary Policy Committee decides whether to push interest rates even higher. Despite the upset, the European Central Bank last Thursday approved a large, half-percentage point rate rise.
After the Credit Suisse deal was announced on Sunday evening, the BoE said Swiss authorities had moved “to support financial stability”, adding: “The UK banking system is well capitalised and funded, and remains safe and sound.”
The Financial Conduct Authority said it was “minded to approve” the aspects of the UBS/Credit Suisse deal which fall under its remit in the UK. Credit Suisse is one of the City’s biggest employers with 5,500 staff.
The deal was welcomed elsewhere, though central banks still feared further trouble.
The Fed said it had joined with the BoE, Bank of Canada, Bank of Japan, European Central Bank and Swiss National Bank in a coordinated action to improve the ability of central banks to prop up struggling private banks through longstanding US dollar swap line arrangements.
Swap lines are agreements between two countries to make currency more readily available for central banks to lend to private banks. This allows them to maintain their reserve requirements – funds a bank holds to ensure it can pay out to customers in case of mass withdrawals.
Two US banks failed this month due to withdrawing their money and it is feared that this could happen if account holders lose their nerve in the face of uncertainty.
In the US swap lines agreements, Britain, for example, might need dollars to satisfy a private bank’s commitments in the American currency. If dollar investors fear a private bank is running out of dollars, they might withdraw their money, potentially making the situation worse.
The BoE will swap pounds with dollars from the Fed with an agreement to swap back at a later date at the same exchange rate, after the fears have subsided.
