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Almost six months after a crisis of confidence shook the U.K. bond market, Nicholas Lyons, the Lord Mayor of London, said he watched closely as turmoil also gripped the U.S. and Swiss banking sector in March.
One key lesson — reinforced by what had already been seen in the U.K’s gilt market last September — was “the speed with which a loss of confidence can lead to a short-term liquidity crisis,” Lyons said in an interview with MarketWatch on Monday.
His second takeaway was how “a run on a bank can happen in an incredibly short time” during the social-media age, as underscored by the collapse of California’s Silicon Valley Bank. Still, he said, it was “reassuring to see the speed with which regulators have responded.”
Lyons, 64, serves as international ambassador for the U.K.’s financial and professional services sector and is head of the City of London Corp., which oversees the Square Mile at the heart of London’s financial district where most trading and investment transactions are carried out.
Financial markets have returned to relative calm since the volatile days of March, giving financial authorities the chance to assess the fallout. Last week, for instance, the International Monetary Fund said the global financial system showed “considerable strains as rising interest rates shake trust in some institutions,” and that “there’s a greater probability of slower growth because of financial instability.”
For his part, Lyons said he doesn’t see the chance of similar banking turmoil unfolding in the U.K. because its banks “are extremely well-capitalized and the quality of regulation is very strong.”
The common thread tying last year’s turmoil in the U.K. bond market to March’s banking-sector developments is the swift rise in bond yields since early 2022 — which caught many regulators and financial-market players off guard. In the U.S., the rise in yields has been primarily due to the Federal Reserve’s aggressive rate-hike campaign to combat high inflation, following years of low interest rates. The U.K.’s problems last fall, though, were sparked by a government tax-cut plan that the market didn’t “like at all,” in Lyons’ words — leading to a loss of confidence in the financial management of the British economy.
The Bank of England ultimately intervened to contain the furious selloff in U.K. government debt that had led to a significant spike in gilt rates.
As of Tuesday, the 10-year gilt rate
TMBMKGB-10Y,
and 10-year U.S. Treasury yield
TMUBMUSD10Y,
were at 3.751% and 3.589%, respectively, or more than two full percentage points each above where they started in January 2022.
“The question that we are all asking ourselves is whether or not there will be another of these ‘isolated’ incidents, where we might not have envisioned where this significant increase in long-term interest rates will manifest itself in a financial problem for somebody,” Lyons said in the interview.
He was in San Francisco on Monday as part of a weeklong trip to the U.S. and Canada, where part of his mission is to drive investment interest in the U.K. — an “absolutely uphill challenge” at a time when U.S. asset managers are searching for opportunities domestically and not abroad, said Terrence O’Hanlon, executive director and founder of the Association of Asset Management Professionals in Fort Myers, Florida.
The Ireland-born Lyons became the 694th Lord Mayor of London in November and serves a one-year term. The role of Lord Mayor is a largely ceremonial one year that’s distinct from that of the Mayor of London, and has its roots in medieval times.
A veteran of the financial industry, Lyons began his career in the early 1980s, working at what would later become JPMorgan Chase & Co.
JPM,
in commercial banking, debt-capital and equity markets, and mergers and acquisitions. He also worked at Lehman Brothers from 1995-2003, five years before its demise in 2008, and is currently on sabbatical from his role as chairman of the Phoenix Group Holdings.
In the interview, Lyons said he sees a “substantial” contrast between the 2007-2008 financial crisis and the 2022-2023 turmoil in the U.K. bond market and banking industry. “Our banking system in the U.K. — and I know this to be true in the U.S. as well — is very, very much better capitalized,” with “much higher levels of Tier 1 capital and balance sheets that have been brought much better under control.
“The buffers that are in place on capital mean there are much better protections,” Lyons said. Still, one of the questions to arise from Swiss regulators’ decision to wipe out Credit Suisse’s Additional Tier 1 bonds, known as AT1s, “is whether or not resolution models that regulators have asked banks to formulate — i.e., how would they do an orderly resolution if there was a solvency or liquidity problem — needs to be looked at again.”
Despite his seemingly sanguine view on the risks of a banking or financial-market crisis, Lyons said he has a somewhat different take on the economic outlook. Britain’s economy ground to a halt in February, the most recent month for which figures are available, and the Bank of England hiked interest rates again in March after 12-month CPI inflation remained stubbornly stuck above 10% in February.
“We are in a situation where quite a lot of the Western economies are either going to go into a shallow recession or may just keep their heads above water. I don’t think it makes much difference one way or the other, to be honest,” he said.
Lyons also said it was “interesting” to see central banks like the Fed intervene to contain the banking fallout, while also continuing to raise interest rates — demonstrating that policy makers’ fight against inflation remains the “No. 1 priority” and that the banking turmoil was “manageable.”
While there are some strong reasons why inflation could fall quickly from current levels, he said, there are also reasons to argue that “a higher level of inflation is likely to persist for longer than most people expect and that, therefore, means interest rates need to stay higher” for longer.
“I certainly struggle to understand the conviction of the International Monetary Fund that we will, in a reasonably short period of time, get back to a low interest-rate environment. I don’t see that happening for a while,” Lyons said. “Bear in mind that for a long time before the financial crisis, we were quite used to interest rates being 4% to 6% [in the U.S. and U.K.], and I don’t think that’s an unhealthy place for them to be long term.”
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