'Be very vigilant': Bank of England chief says the market is testing banks to identify weakness

cnbc.com:

LONDON — Bank of England Governor Andrew Bailey on Tuesday vowed to be «very vigilant» amid ongoing volatility and suggested that the market is «testing out» banks to find weaknesses.

Global banking stocks have taken a beating in March, as contagion fears spread following the collapse of U.S.-based Silicon Valley Bank — the largest bank failure since the financial crisis — and the emergency rescue of Credit Suisse by Swiss rival UBS.

Bailey told the U.K.'s Treasury Select Committee that U.S. authorities are dealing with particular issues relating to regional banks stateside, and that Credit Suisse was an «institutional story» — but affirmed that the U.K. banking system is «in a strong position capital and liquidity-wise.»

Friday saw a sharp sell-off of European banking shares led by Deutsche Bank, which confounded many analysts, given the German lender's return to consistent profitability, along with its robust capital and liquidity position.

Deutsche recovered partially on Monday to lead gains as the market panic appeared to subside, after First Citizens agreed to buy a large chunk of failed Silicon Valley Bank's assets.

«I also think what we saw at the tail end of last week, Friday in particular, when there were quite sharp market movements [were] moves in markets to, if you like, test out firms,» Bailey told lawmakers.

«I would not want to say that those in my estimation are based on identified weaknesses, more than testing out, I mean there is quite a bit of testing out going on at the moment.»

Bailey pointed out to differences between U.S. and U.K. regulations in the treatment of interest rate risk in the banking book (IRRBB) — which refers to prospective risks to bank capital and earnings from adverse movements in