Why Bank of England governor Andrew Bailey should stop talking about a 'banking crisis'

By continuing to say a banking crisis won’t happen, Andrew Bailey increases the probability of a collapse, writes Henry Sandercock

Bank of England governor Andrew Bailey has failed to impress since taking the role in 2020 (image: Mark Hall / Getty Images)Bank of England governor Andrew Bailey has failed to impress since taking the role in 2020 (image: Mark Hall / Getty Images)
Bank of England governor Andrew Bailey has failed to impress since taking the role in 2020 (image: Mark Hall / Getty Images)

In a speech given to an event in Washington DC on Wednesday (12 April), Bank of England governor Andrew Bailey said: “I do not believe we face a systemic banking crisis”.

It brought to mind a quote from ‘The Thick of It’ spin-off ‘In The Loop’, where a fictional British Cabinet Minister says a war in the Middle East is “unforeseeable”. It sparks a chain of events in the film where a war becomes almost inevitable.

It’s a situation we’ve all been in to some degree. The more you have to say something isn’t a problem, the more it begins to sound like one. But the problem, in this case, is that the more you talk about a banking crisis, the more likely a financial meltdown becomes.

How did we get here? In early March, medium-sized US banks Silicon Valley Bank (SVB) and Signature Bank both collapsed. Both were the subject of 'runs': when investors pull money out of a bank due to fears it could run out of money, which in turn acts as a self-fulfilling prophecy as more investors get freaked out and pull out their cash. It's what happened to Northern Rock in the UK in 2007.

The failure of both SVB and Signature sent shockwaves around the global financial system. Shares in other banks began to fall as investors asked themselves how it could be that two relatively successful banks could fail so quickly.

These shockwaves proved too much for Credit Suisse to weather. The Swiss investment bank had been struggling for years as a result of a series of scandals, with the country’s government deciding its collapse would be too risky for the global financial system. So, it stepped in to facilitate a buyout by UBS.

Markets have remained uneasy ever since. Things have calmed down to an extent, but pronouncements - like the IMF’s warning this week that the global economy is “quite fragile” - demonstrate a lack of confidence in what’s coming down the track.

While no one truly knows what will happen tomorrow, let alone next week, the fact is that the UK’s banks - as Andrew Bailey likes to keep saying - are in a strong position. The reason for this, he says, is that rules introduced after the 2008 financial crisis “have worked”.

His view was echoed by Robert Webb, professor of banking and applied economics at the University of Stirling. He told NationalWorld in March that specific reforms, like the countercyclical buffer [a cash cushion the Bank of England can force banks to have if it thinks risk is growing], and the ring-fencing of consumer banking from riskier investment banking have “all actually worked”.

Interestingly, the US banks that failed had all successfully lobbied for a relaxation of post-2008 rules. This fact should not be lost on Chancellor Jeremy Hunt, who said he wanted to rip up some of the UK’s protections in his Edinburgh Reforms speech back in December 2022.

But while rules certainly help, Professor Webb also cautioned that banks are only as strong as the confidence we all have in them. “Everything in finance is to do with confidence, information and money. If the market sentiment goes against you - and it can happen so much faster now because of Twitter, Reddit, Instagram etc - information and misinformation can travel at lightning speed and can cause rapid panic,” he said. While he added that he believed banks are healthy, he said: “If the village says that there’s an issue, there’s an issue.”

So, no matter the facts about a bank’s financial health, if people lose confidence in it, it can drag the institution down.

Which brings us back to Andrew Bailey’s remarks this week. While he was trying to instil confidence in the system, intervening on this issue yet again (by my count, this is the fifth time in under a month) risks doing the opposite.

The problem is that Bailey has made several errors since assuming his position in 2020. His political interventions, including when he said companies should only give out pay rises to workers after careful consideration, suggest a detachment from the realities faced by normal people - hardly a useful trait when you then try to convince the public that their money is safe in banks.

He does not have the political acumen of his suave predecessor Mark Carney. But he can learn from Carney’s timeliness. As the former governor kept his powder dry until it really mattered, so Bailey should steer clear of negation in these strange times.