UK banks facing turmoil with 'domino effect' ripping across Europe

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The UK banking sector could be hit by interest rate rises (Image: Getty)

The UK risks falling into another 2008-style banking crisis as interest rates rise and banks abroad plunge into turmoil.

Political economist Richard Murphy told Express.co.uk that the collapse of Silicon Valley Bank in the US and Credit Suisse in Switzerland should serve as a warning sign for Britain.

He argues that, like these firms, UK banks could have similar vulnerabilities that have not yet been exposed.

Mr Murphy said: "The point is, at the moment there are lots of banks, we don't know how many, who have losses. But we don't know whether they are able to pay.

"In that sense, this is 2008 all over again. Because that was the whole problem in 2008."

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Mr Murphy adds that is it possible that UK banks could "topple" if they have similar vulnerabilities that have flown under the radar.

He added: "US banks are meant to have assets of $22trillion and liabilities of $20trillion. So in theory there is $2trillion left over to support the US banking system.

But some academics have done a study that finds the US banks must have lost at least that much on government bonds. So technically they are bust

"Is that also likely to be true in the UK? Yes it is possible because of the enormous increase in interest rates.

"It is possible one of these banks in the UK could topple over? Yes. Would the Government have to step in? Yes. Would the Government have to guarantee deposits? Yes."

Credit Suisse collapsed earlier this month (Image: Getty)

Interest rates increased to 4.25% by Bank of England - UK faces 'full-blown recession'

The central bank's Monetary Policy Committee (MPC) has announced a 0.25 percentage point increase to the country's base rate.

For the past year, the Bank of England has hiked interest rates multiple times in an attempt to rein in inflation with this being the 11th increase in a row.

Read the latest HERE.

Earlier this month, fears were raised when Silicon Valley Bank (SVB) - the US' sixteenth-largest bank known for services in the technology industry - collapsed.

SVB had benefitted from low-interest rates and a boom in the tech industry but was plunged into crisis this month when customers withdrew their deposits from the lender.

Another problem was the fact that, several years ago, the bank put a lot of its funds into government bonds.

Interest rates then soared last year as the Federal Reserve tried to bring down inflation in the US, causing the value of the bonds to sink.

SVB then announced it would sell $2.25billion (£1.8billion) in new shares to plug the hole in its finances, provoking many customers to withdraw their cash. The bank's stocks then plummeted.

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UK banks could enter a 2008-style crisis, an expert said (Image: Getty)

As for Credit Suisse, concerns have surrounded how profitable it is for years, and the bank admitted last week that it had found "material weakness" in its financial reporting.

The Saudi National Bank, a major backer of the Swiss bank, subsequently withdrew its funding. Then, other banks did the same.

Credit Suisse was saved by its rival UBS for $3.15billion (£2.6billion).

While Mr Murphy believes there are parallels between these crises and potential vulnerabilities in the UK, another expert is more bullish about Britain's financial sector.

Julian Jessop, an independent economist, and fellow at the Institute of Economic Affairs, believes UK banks are transparent enough to inspire confidence.

The Bank of England has raised interest rates (Image: Getty)

However, he also warned that the Bank of England must be careful that increased borrowing costs don't spark a banking crisis in the UK.

On Thursday, raised interest rates to 4.25 percent from 4 percent while predicting the UK economy to grow slightly between April and June.

Mr Jessop told Express.co.uk: "We've seen in the UK how interest rates can do this. We saw last Autumn after the mini-budget with the pension fund crisis. This is a warning of the effects of interest rates rising.

"There are other ticking time bombs in the economy that haven't gone off yet so the Bank of England has to be careful."

On UK banks, he added: "The balance sheets are there for everyone to see. You can see what bonds they own and so on. The main banks like HSBC and Barclays and so on make it clear what they are doing and they have to report what they will do if for example housing prices collapsed or interest rates rose.

"The medium-sized and large banks in the UK I wouldn't be particularly worried about."

People pass a branch of Silicon Valley Bank in Santa Monica (Image: Getty)

Janet Yellen guaranteed the deposits for two banks (Image: Getty)

Both Mr Murphy and Mr Jessop agree that an intervention from US Treasury Secretary, Janet Yellen, could also cause issues for the global banking sector.

Following Silicon Valley Bank and Signature Bank's collapses, Ms Yellen pledged to guarantee their deposits.

But experts fear that this will create a moral hazard whereby investors move their money to less stable, more risk-prone banks because they know their funds will be protected if anything goes wrong.

Mr Murphy said: "What Janet Yellen has done is open up the hornets' nest by guaranteeing the deposits. Money is going to move into small US banks because they will think they can't lose their money.

"Why would people keep their money in the UK when you are guaranteed not to lose it in a US bank?

Mr Jessop added: "The US authorities have gone too far. What they have done is the wrong thing, it sends a dangerous message for the future that risky banks will always be bailed out."

Other experts have warned that the eurozone could also be at risk.

Emilios Avgouleas, University Chair in International Banking Law and Finance at the University of Edinburgh told Express.co.uk that Deutsche Bank could be hit hard due to its exposure to Credit Suisse.

He said: "Banks with exposure to Credit Suisse will be vulnerable. Deutsche Bank will be vulnerable. The premium over the credit default swaps has increased over the past few days. This signals that the markets expect Deutsche Bank will be the next big European bank to fail."

He continued, saying that Deutsche Bank has serious problems on the asset side of its balance sheet, adding: "The next domino to fall in Europe is probably Deutsche Bank."

Deutsche Bank declined to comment.

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