Has the pound and the world averted a new financial crisis?

Bank of England Policy Troubling Pound Sterling

Much of the talk lately around finance has related to the potential for another financial crisis, after the failure of Silicon Valley Bank and others in the US, and the failure of Credit Suisse, being bought out by their historic rival UBS in Switzerland.

Yesterday, Andrew Bailey, Governor of the Bank of England was quick to soothe fears, reporting officials are ‘very vigilant’ about market conditions, and monitoring events with the potential for further troubles.

Signs of financial pressure could easily trigger turbulence for sterling exchange rates, and sterling rates did experience some volatility recently which saw GBPEUR and GBPUSD levels rise to some of the highest this year. In principle however, a banking crisis would arguably be sterling negative.

The good news is that banks are much better capitalised in 2023 than 2007-2009 when we last saw a banking crisis. Expectations for the coming weeks and months are slightly nervous, and the confidence eschewed by policymakers might ring hollow in some quarters.

During the 2007-2009 period the breakdown in confidence began in a similar manner, with a series of bailouts designed to protect consumers and restore confidence. Eventually it got to a point where the regulators and governments globally said enough was enough and once a few banks were allowed to go bust, confidence disappeared and led to a damaging series of events.

This is exactly what we are currently witnessing, with regulators currently looking to step in to prop up the banks, but for how long can this go on? Markets do seem calmer after the worries last week and previous, but with us experiencing a clear dramatic shift in interest rate policy in the last year, will there be more surprises ahead?

Rising interest rates, which in economic theory would lead to a stronger currency, could ultimately trigger a weaker pound if ultimately many banks are not prepared for the changes like Silicon Valley Bank proved. By having many of their investments tied up in lower value bonds, the shift in interest rate policy had caused many of their investments to lose value.

One key point is that with most financial crises, we don’t spot the problems until it is too late. And any initial problems are quickly dismissed as ‘under control’ in the first instance. Governor Bailey’s comments yesterday could yet prove very telling, and the links with previous banking crises are clear to see.

GBPUSD trades at 1.2320 and GBPEUR 1.1362 at the time of writing. Friday is the latest UK GDP data, so if you have any currency transactions you are considering in the coming weeks or months, and wish to learn more regarding the latest market news, please do get in touch.


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