Regulatory reforms since the 2008 financial crisis cannot be blamed for the sharp discount in UK commercial bank valuations, Bank of England Governor Andrew Bailey said.

In a speech on a visit to the East Midlands, Bailey argued that more reforms are needed to protect banks from runs like the one that broke Silicon Valley Bank UK last year. 

He also dismissed concerns about the UK falling into recession, saying any downturn "will be shallow." Official figures this week may show the economy contracted in the fourth as well as the third quarter of 2023, but growth now appears to be picking up. 

"What I put more weight on is...the indicators we've seen since then," Bailey told an audience at Loughborough University. The economy is showing "some signs of upturn."

Bailey said new rules designed to strengthen the financial system following the collapse of Lloyds Banking Group and Royal Bank of Scotland in 2008 have proved a success as "lenders have come through the turbulence of the last four years in sound health."

However, he said UK lenders will in future need to hold large liquid assets for financial stability reasons. Major UK banks currently have £467 billion ($590 billion) of cash-like "reserves" at the BOE and, while the number will fall, it will settle far higher than the £10 billion they held at the BOE before 2008.

Britain's banks are trading below their book value, a sign that investors believe they will lose money on their activities. The lenders are also on lower stock market valuations than peers in the US and elsewhere. 

Bailey said it remained "a puzzle" but he wanted "to rebut" the two explanations commonly given. Higher regulatory capital requirements have been blamed but more capital "greatly benefits the stability of the system," he said. 

Source : Bloomberg