Banks in the line of fire: Bailey can provide reassurance with an early rate cut, says ALEX BRUMMER

The $10 trillion wipeout of global share prices as a consequence of Donald Trump’s beggar-thy-neighbour trade war represents an enormous shock to financial stability.

In a world of hedge funds, private equity, family wealth offices and the like – where leverage plays a big role in trades – it is inconceivable that there are no casualties.

Someone somewhere, as we know from the Great Financial Crisis of 2008, will have made the wrong call and be sitting on unsustainable losses.

Banks watching the underlying value of assets dropping like a stone will be making margin calls and asking for more collateral.

The financial world is much more prepared for crisis than it was in 2008, thanks to work by the Financial Stability Board, now headed by Bank of England governor Andrew Bailey, and the central bankers’ club at the Bank for International Settlements in Basel.

Yet we know from the collapse of Credit Suisse in March 2023 and the implosion at tech lender Silicon Valley Bank that tighter supervision and requirements for banks to hold more capital as a cushion against crisis haven’t made lenders invulnerable.

Rate debate: Bank of England Governor Andrew Bailey has direct experience of successive market conniptions

The push for lighter-touch regulation in the UK, led by the Chancellor Rachel Reeves as part of her growth agenda, was not received with enthusiasm on Threadneedle Street.

Sam Woods, chief executive of the Prudential Regulatory Authority, cautioned earlier this year against a ‘race to the bottom’. He argued that the effort to prioritise growth ‘put us in the firing line’.

Reeves will have been reminded that the events of the last week, as Trump upended stability, demonstrate why there can never be room for complacency when it comes to volatile markets.

She felt anxious enough yesterday to call her former boss Bailey to check all was well. She was assured that ‘markets are functioning effectively, and our banking system is resilient’.

She certainly wasn’t going to share with the public if, as in 2007 with Northern Rock, there were to be a silent run of deposits in wholesale markets.

It is just as well that bureaucracy in Britain works slowly, and it hasn’t been chocks away for more competitive banks.

Big gains were made in equities ahead of the tariff crash, especially by investors exposed to the now-less-than-Magnificent Seven and illiquid start-ups.

Bailey was also right to push back against any idea that insurance

companies and pension funds should be compelled to invest in UK equities and infrastructure.

The best reassurance the Bank could provide is an early interest rate cut. Reeves likes to claim credit for the three rate cuts made by the independent Monetary Policy Committee since Labour took office.

It may provide a positive political narrative but could harden the heart of rate setters.

Bailey was wrong on transitory inflation after the Covid pandemic and Ukraine. But he has direct experience of being in the engine room of the Bank during successive market conniptions.

Regarding central banks, it was always inevitable that President Trump, true to form, would eventually lose his rag with Federal Reserve chairman Jay Powell.

Trump’s social media account has declared: ‘Cut interest rates Jerome and stop playing politics.’

Powell, who was Trump’s Republican choice in his first term to replace Janet Yellen, is circumspect recognising that he needs to navigate a path between the inflationary and recessionary impacts of a trade war.

The Fed has a mandate to support output and employment. And with many private sector forecasters now pricing in a US recession as a response to Trump’s reciprocal tariffs, Powell may have no other choice but to change the key Federal Funds rate of 4.25 per cent to 4.5 per cent.

Oh, to be a fly on the wall when socialist Rachel Reeves meets with billionaire US Treasury Secretary Scott Bessent ‘shortly’ to discuss Britain’s hoped-for ‘economic deal’ with the US.

No one will be more knowledgeable about the fragility of UK public finances and bond markets than Bessent.

He was, after all, architect of Britain’s painful expulsion from the exchange rate mechanism in 1992.