Andrew Bailey: Monetary and financial stability - lessons from recent times Speech by Mr Andrew Bailey, Governor of the Bank of England, at the Institute of International Finance, Washington DC, 12 April 2023. *** It is a great pleasure to be back in Washington. There is plenty going on and a great deal to talk about, so thank you to the IIF and Oliver Wyman for organising this event. I want to pick out big issues we face, and try to set out how they fit together and the challenges they give rise to. In recent weeks, we have seen the crystallisation of problems in a few parts of the banking sector. This is against a background of a necessary sharp tightening in monetary policy to bring down inflation from levels that are much too high. All of this has to be set against the most serious global pandemic for at least a century and the most serious war in Europe since 1945. Let me therefore draw a first set of conclusions and propositions from what is going on. The post crisis reforms to bank regulation have worked. Today I do not believe we face a systemic banking crisis. When I look at the UK banks, they are well capitalised, liquid and able to serve their customers and support the economy. This positive assessment of financial stability is important for monetary policy.
For instance, for a regional cross-border banking group, I imagine the supervisory team to be based in the relevant region, perhaps in the same premises as the national supervisor, and to consist of staff from that region. As for crisis resolution, one could think of the EU building up a deposit insurance fund for the largest cross-border banks, possibly within the framework of the new European supervisory agency, akin to the Federal Deposit Insurance Corporation in the USA. This would considerably reduce the risk of destructive negotiation games. Such a deposit insurance fund would certainly be better diversified than the national funds are today, which would, all else being equal, enable it to charge lower fees or hold a larger risk-adjusted buffer. However, the fund itself would lack the ability to handle the largest banking failures. In order to cope in the event of a really large bank or several large banks failing, the fund should be able to borrow in the capital market. To be able do this in a cost-efficient manner, it would need backing by a government guarantee from the 25 member states. In the event that the European deposit insurance fund is not able to recover enough money from a troubled bank to repay its creditors in the capital markets, a key for burden sharing would need to be in place. One could establish a system of committed payment obligations, where the fund has the right to receive contributions according to the agreed key to pay back its capital market loans.