The use of technology in the banking sector increases the risk of bankruptcy of financial institutions, which is why regulators should take measures to ensure that maintain adequate liquidity insurance by lenders.
A statement of the relevant content was made by Andrew Hauser, Executive Director for Markets at the Banks of England, during a speech at King’s College London on Friday, November 3. According to him, an example of the relationship between the scale of technology use and the level of risk of bankruptcy of financial institutions is the events in the United States in the spring of this year, when several local creditors collapsed. It should also be clarified that in the statement on the need for measures to ensure proper liquidity insurance, by regulators it meant central banks.
Andrew Hauser says that the risk of lenders collapsing as a result of the introduction of technology is one of the most serious problems that mentioned regulators are currently facing. He also said that the question of where the central bank’s balance sheets should be located remains unresolved since the developers of monetary policy are returning the dynamic of inflation to the target indicator.
Separately, Andrew Hauser noted that at present another serious problem faced by regulators is the achievement of ensuring the stability of the financial system. The relevance of this issue is that liquidity shocks are a phenomenon that demonstrates a trend of scalability both among traditional lenders and among non-banking organizations providing financial services.
During his speech, Andrew Hauser said that these issues cover the entire sphere of competence of the central bank. He noted that due to this circumstance, different people with different goals, analytical frameworks, and policy tools take part in the discussion of ways to solve the problem. But, according to him, in this case, there is one important common factor, which is the reserves of the central bank, the final form of settlement, and the safest and most liquid of all financial assets.
Andrew Hauser said that in response to current challenges, the Bank of England is increasing the constant volume of reserves compared to 2008. He noted that this decision will allow for maintaining monetary control and micro- and macroprudential stability.
According to Andrew Hauser, the Bank of England, in cooperation with other organizations, is also working on expanding alternative sources of liquidity and exploring how to calibrate the available tools to return market incentives and disciplines to more centralized liquidity management firms.
Many people saw for the first time what the bank’s collapse means in practice in March of this year when clients of American lenders Silvergate Capital, Silicon Valley Bank, and Signature Bank undertook something like super efforts to withdraw money from accounts in bankrupt organizations.
In April 2023, First Republic Bank announced a 25% reduction in the workforce and a decrease in spending, to strengthen the business after it faced bankruptcy and received support in the form of deposits worth $30 billion from other financial institutions.