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U.S. banking turmoil offers fresh lessons for U.K., says Lord Mayor of London

Almost six months after a disaster of confidence shook the U.Okay. bond market, Nicholas Lyons, the Lord Mayor of London, stated he watched carefully as turmoil additionally gripped the U.S. and Swiss banking sector in March.

One key lesson — bolstered by what had already been seen within the U.Okay’s gilt market last September — was “the speed with which a loss of confidence can lead to a short-term liquidity crisis,” Lyons stated in an interview with MarketWatch on Monday.

His second takeaway was how “a run on a bank can happen in an incredibly short time” in the course of the social-media age, as underscored by the collapse of California’s Silicon Valley Bank. Still, he stated, it was “reassuring to see the speed with which regulators have responded.”

Lyons, 64, serves as worldwide ambassador for the U.Okay.’s monetary {and professional} companies sector and is head of the City of London Corp., which oversees the Square Mile on the coronary heart of London’s monetary district the place most buying and selling and funding transactions are carried out.

Financial markets have returned to relative calm because the unstable days of March, giving monetary authorities the possibility to evaluate the fallout. Last week, as an example, the International Monetary Fund stated the worldwide monetary system confirmed “considerable strains as rising interest rates shake trust in some institutions,” and that “there’s a greater probability of slower growth because of financial instability.”

For his half, Lyons stated he doesn’t see the possibility of comparable banking turmoil unfolding within the U.Okay. as a result of its banks “are extremely well-capitalized and the quality of regulation is very strong.”

The frequent thread tying final yr’s turmoil in the U.K. bond market to March’s banking-sector developments is the swift rise in bond yields since early 2022 — which caught many regulators and financial-market gamers off guard. In the U.S., the rise in yields has been primarily because of the Federal Reserve’s aggressive rate-hike marketing campaign to fight excessive inflation, following years of low rates of interest. The U.Okay.’s issues final fall, although, had been sparked by a authorities tax-cut plan that the market didn’t “like at all,” in Lyons’ phrases — resulting in a lack of confidence within the monetary administration of the British economic system.

The Bank of England ultimately intervened to comprise the livid selloff in U.Okay. authorities debt that had led to a major spike in gilt charges.

As of Tuesday, the 10-year gilt price

and 10-year U.S. Treasury yield

had been at 3.751% and three.589%, respectively, or greater than two full proportion factors every above the place they began in January 2022.

“The question that we are all asking ourselves is whether or not there will be another of these ‘isolated’ incidents, where we might not have envisioned where this significant increase in long-term interest rates will manifest itself in a financial problem for somebody,” Lyons stated within the interview.

He was in San Francisco on Monday as a part of a weeklong journey to the U.S. and Canada, the place a part of his mission is to drive funding curiosity within the U.Okay. — an “absolutely uphill challenge” at a time when U.S. asset managers are looking for alternatives domestically and never overseas, stated Terrence O’Hanlon, govt director and founding father of the Association of Asset Management Professionals in Fort Myers, Florida.

The Ireland-born Lyons turned the 694th Lord Mayor of London in November and serves a one-year time period. The function of Lord Mayor is a largely ceremonial one yr that’s distinct from that of the Mayor of London, and has its roots in medieval instances.

A veteran of the monetary trade, Lyons started his profession within the early Eighties, working at what would later develop into JPMorgan Chase & Co.

in business banking, debt-capital and fairness markets, and mergers and acquisitions. He additionally worked at Lehman Brothers from 1995-2003, 5 years earlier than its demise in 2008, and is at present on sabbatical from his function as chairman of the Phoenix Group Holdings.

In the interview, Lyons stated he sees a “substantial” distinction between the 2007-2008 monetary disaster and the 2022-2023 turmoil within the U.Okay. bond market and banking trade. “Our banking system in the U.K. — and I know this to be true in the U.S. as well — is very, very much better capitalized,” with “much higher levels of Tier 1 capital and balance sheets that have been brought much better under control.

“The buffers that are in place on capital mean there are much better protections,” Lyons stated. Still, one of many inquiries to come up from Swiss regulators’ choice to wipe out Credit Suisse’s Additional Tier 1 bonds, generally known as AT1s, “is whether or not resolution models that regulators have asked banks to formulate — i.e., how would they do an orderly resolution if there was a solvency or liquidity problem — needs to be looked at again.”

Despite his seemingly sanguine view on the dangers of a banking or financial-market disaster, Lyons stated he has a considerably totally different tackle the financial outlook. Britain’s economic system ground to a halt in February, the newest month for which figures can be found, and the Bank of England hiked rates of interest once more in March after 12-month CPI inflation remained stubbornly caught above 10% in February.

“We are in a situation where quite a lot of the Western economies are either going to go into a shallow recession or may just keep their heads above water. I don’t think it makes much difference one way or the other, to be honest,” he stated.

Lyons additionally stated it was “interesting” to see central banks like the Fed intervene to comprise the banking fallout, whereas additionally persevering with to lift rates of interest — demonstrating that coverage makers’ battle in opposition to inflation stays the “No. 1 priority” and that the banking turmoil was “manageable.”

While there are some robust explanation why inflation might fall rapidly from present ranges, he stated, there are additionally causes to argue that “a higher level of inflation is likely to persist for longer than most people expect and that, therefore, means interest rates need to stay higher” for longer.

“I certainly struggle to understand the conviction of the International Monetary Fund that we will, in a reasonably short period of time, get back to a low interest-rate environment. I don’t see that happening for a while,” Lyons stated. “Bear in mind that for a long time before the financial crisis, we were quite used to interest rates being 4% to 6% [in the U.S. and U.K.], and I don’t think that’s an unhealthy place for them to be long term.”



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