The governor of the Bank of England, Andrew Bailey, has played down the risks of a system-wide banking crisis, paving the way for further interest rate increases to combat the UK’s high inflation levels. Despite the recent problems that affected regional banks in the US and Credit Suisse in Europe, Bailey said the reforms to make banks safer after the 2008 global financial crisis had worked and there was no need to alter Threadneedle Street’s approach to setting borrowing costs. But he said that the growth of the non-bank financial sector, including institutions such as hedge funds and pension funds, meant there were now fresh risks to stability that needed to be monitored. Speaking in Washington, where he is attending the spring meetings of the International Monetary Fund, Bailey said problems had surfaced in a “few parts” of the banking sector after the “necessary sharp tightening in monetary policy to bring down inflation from levels that are much too high”. The governor added: “The post-crisis reforms to bank regulation have worked. Today I do not believe we face a systemic banking crisis. When I look at the UK banks, they are well capitalised, liquid and able to serve their customers and support the economy.” Bailey said his “positive assessment” of financial stability mattered for monetary policy – the decisions taken by the Bank’s monetary policy committee (MPC) on interest rates and the buying and selling of bonds. The MPC took account of any dislocation to credit markets caused by bank failures to the extent they influenced inflation. “But, what we have not done – and should not do – is in any sense aim off our preferred setting of monetary policy because of financial instability. That has not happened,” he said. The Bank has raised interest rates at its last 11 meetings, increasing the cost of borrowing from 0.1% to 4.25% since December 2021. Bailey’s comments are likely to prompt speculation of a further 0.25-point increase at the MPC’s next meeting in early May. In a wide-ranging speech, Bailey said the collapse of Silicon Valley Bank in California showed that with existing technology – in terms of communication and speed of access to bank accounts – bank runs could go further much more quickly. It needed to be recognised, the governor added, that the growth of non-bank finance had led to the “significant expansion” of the landscape of systemic risk since the crisis that led to the near-collapse of the banks in 2008. “This helps to explain why at the Bank of England we are conducting a system-wide stress exercise involving non banks as well as banks to help us to map out the risks,” Bailey said. The governor said stress tests would not always deal with “black swans” – events not predicted in advance that have a large-scale impact. Policymakers needed tools to deal with these problems, such as when the Bank temporarily intervened and bought bonds to bail out the UK’s pension funds during the market turmoil that followed Kwasi Kwarteng’s badly received budget last September.