Monitoring Financial Stability

Sir John, thanks so much for joining us on The Swap.

It's a real honor to have you here with us today.

I'd like to start off by looking back at the market turmoil in March of 2020.

Several reports, including a recent one from the Financial Stability Board, have noted that banks and financial markets remained resilient during the market turmoil of 2020, which is largely attributed to two factors.

One is the quick action by central banks to pump money into the financial system, and the second was the regulatory reforms implemented after the crisis.

Would you agree with this and have the post-crisis reforms made financial markets and derivative markets in particular more resilient?

So I think, Scott, you have to unpack that a little bit if I can.

I think the banking system was made markedly more resilient by the reforms to both capital and the liquidity side that we brought in after the financial crisis.

It's just the amount of capital and the quality of capital.

So when you went through that period somewhere around about the end of February, beginning of March, where everyone looked at the world economy and basically repriced all assets.

We did not get concerns about which banks would take losses.

At that point, we didn't know how the public sector was going to step in governments to support employment, to support firms.

We did not get people, analysts and market participants saying, okay, which banks are weak? Which banks have lent to this sector, et cetera? Who's got weak capital? And then you get that cycle starting where credit suddenly starts to be withdrawn in the system.

Think back to 2007, 2008.

And likewise, we didn't get counterparty credit risk.

People saying, okay, somebody's holding a bond here.

Who's holding the bond? So that worked, I think, very well.

And particularly the wholesale market banks, you know, the market makers and the like, There was no suggestion that they were going to suffer in this crisis.

And on the retail side, retail and corporate, I mean, UK banks lent 30 times more in March 2020 than they do in a normal month.

So before all the government support and everything else came in, corporates drew down on those revolving credit facilities.

And the banks absorbed that.

They had the liquidity and they had the capital.

The reason why markets remain stable was primarily because central banks intervened.

So you only have to look at the dash for cash.

And what you saw happen, you see it from about third week, second week of February to first week of March.