Mr Bailey was speaking at Loughborough University’s Business School last night and addressed staff, students and guests. He also took questions from the audience about several topics including the future of digital currency and AI.
His lecture focussed on a number of important and topical issues such as bank regulation, capital and liquidity requirements, the puzzle surrounding the market valuation of banks, the debate about the fractional reserve system of banking, and the impact of COVID on the UK economy.
“The last four years have seen major macroeconomic disruptions that we have had to work through,” said Mr Bailey.
“But they have not created disruptions to the UK banking system, and thus to financial stability, of the sort that we have seen in the past.
“This time the banks have supported the economy through lending not the other way round, and that’s how it should be.”
His lecture then turned to the “puzzling” low market valuation of large UK banks.
“With interest margins restored to more normal levels, and loan impairments subdued by historical standards, this puzzle deserves further study.
“Last year, we did see strains in banks elsewhere, and this has raised questions about appropriate liquid asset buffers as digital technology appears to increase the potential speed and potency of bank runs.
“I have set out two views on what follows from this, which are closely linked. First, I think the answer is more for banks to supplement their liquid asset holdings with efficient and extensive access to the liquidity facilities provided by the Bank of England.
“Second, those liquid asset holdings will, however, most likely mean that banks hold larger reserves at the Bank than was the case before the financial crisis.”
He also argued that if we want to preserve the benefits of fractional reserve banking there is a need to ensure that the assets created by the credit process are available for re-discount at the central bank in greater scale and under a process that can be operated very quickly.
David Llewellyn, Emeritus Professor of Money and Banking, said after the lecture that: “This is an important lecture which raises several important issues related to bank and market behaviour and the impact of bank regulation. It will surely be widely studied for some considerable time to come.”
Image: The Bank of England building in London. Credit: Getty
Audience members asked questions of the Governor after his talk.
They included the consequences of central bank interventions, regulating the shadow banking system and the possibility of another recession – a second economic downturn is expected to be announced on Thursday.
Responding, Mr Bailey said: “I wouldn't put too much weight on that [announcement].
“As others have said, if we do get two successive negative portions it will be very shallow.
“What I would put more weight on is that the indicators we have seen since then have shown some signs of upturn.
“There is still a long way to go, but we are beginning to see signs of an upturn.”
Mr Bailey also warned that although AI presents new opportunities for finance, it is important to understand fully the implications of using such technology.
The Governor was welcomed to Loughborough by Vice-Chancellor Professor Nick Jennings.
He said: “I’m incredibly proud that our University attracts students, researchers and staff who want to make a difference to communities and economies by transforming the way that the world does business.
“I’m also delighted that today’s event so perfectly illustrates our strategic aim to develop meaningful partnerships that bring people and organisations together.
“Indeed, our links with the Bank of England stretch back many years.”
Mr Bailey is the third Bank of England Governor to have given a lecture at Loughborough.
In 1986, Robin Leigh-Pemberton outlined why change in monetary policy was necessary.
Ten years later Robin’s successor, Eddie George, visited to reflect on how monetary policy had evolved in the years since the previous Governor’s Loughborough lecture.
“Times have certainly changed since Eddie George gave us his insights here in 1996,” said Prof Jennings.
“The impact of Brexit, the ongoing cost-of-living crisis, and the legacy of the global pandemic all still loom large on the UK’s economic agenda.
“Overseeing the country’s financial stability in the coming years will be no mean feat, but I know we’re in good hands.”
The full speech is available here.
ENDS