LONDON - Investment banks need to prepare for tougher times ahead by properly checking risks from their clients as a prolonged period of cheap money ends, Bank of England executive director Nathanael Benjamin said on Wednesday.
Inflation in Britain reached a 40-year high of 9.4% in data published on Wednesday and BoE Governor Andrew Bailey has said there will be "no ifs no buts" when it comes to raising rates to quell rising prices - and making credit more expensive for clients of banks.
Benjamin said there is a generation of bankers who have only experienced a largely benign economic environment when banks made "very large" profits and now lenders have to learn to swim in a different situation.
"It is highly probable there are individual businesses or marginal players that have relied upon the easy conditions of the past decade who might struggle to adapt when the new tide comes in," Benjamin told an event held by UK Finance, a banking industry body.
"Banks’ executive management and boards should challenge themselves and think ahead about what their firm’s place is in this new world."
Benjamin, responsible for supervision of international banks in London, said the collapse of Archegos and, earlier this year, suspension of nickel trading in London after the metal spiked to record highs showed that counterparty risk concentrations were not being appropriately identified or controlled at banks.
Many of the nickel positions were "over the counter" and outside Britain, and Benjamin said banks need to learn lessons from that.
"Risk concentration should not only be assessed on a client by client basis, but across all clients combined," Benjamin said.
"Whilst this information may not be readily available, the onus is on firms to demand of their clients the information they need to assess the risks they are exposed to."
Benjamin said it was for the banks, not the regulator, to ask the right questions, and if clients don't want to give an answer then "maybe you need to draw a conclusion from that".
"We are really trying to push for more on that," Benjamin said.
(Reporting by Huw Jones, Editing by Louise Heavens, Nick Macfie, William Maclean)