Government allays fears of financial crisis

Rishi Sunak and Jeremy Hunt tried to ease fears of a new financial crisis last night after British start-ups were left on the brink from the first bank collapse since 2008. The Prime Minister said there was no “systemic contagion risk” after the collapse of Silicon Valley Bank and the Chancellor said earlier that the Treasury was working to find a solution for clients of its UK branch that “minimises” or avoids losses to companies caught up in the chaos.

When Rishi Sunak vowed to make Britain a technology “superpower” by the end of the decade, the Prime Minister had little idea just how soon this strength would be put to the test.

The collapse of Silicon Valley Bank (SVB) just days later threw the sector into turmoil and, by Saturday night, tech firms were called to emergency meetings with City minister Andrew Griffith amid concern for thousands of jobs. Sunak rushed to offer assurances, suggesting companie caught up in the crisis could be offered a bailout.

Yet critics have questioned whether taxpayer money should be used to bail out the tech sector at a time when the public finances are already under significant strain. Some have argued that Chancellor Jeremy Hunt should be prepared to let companies go under.

“Private businesses should certainly not expect taxpayer bailouts,” says Julian Jessop, economics fellow at the Institute for Economic Affairs (IEA).

Founders and venture capitalists have been lining up to issue apocalyptic warnings about the collapse of SVB, which is reported to have 3,300 clients in the UK, including a large number of startups. Customers’ deposits are protected only up to £85,000, leaving many firms scrambling to seek emergency funding. About 200 companies signed a letter to the Chancellor warning of an “existential threat” to the tech sector.

Despite the pleas, there are lingering concerns over a state intervention. The competitive nature of the sector means many nascent outfits are doomed to fail. About three-quarters of firms that raise seed funding never make it to a Series A round, Dealroom data shows.

So, why should public funds go to businesses that may not have been viable anyway? The scenario echoes the Government’s Future Fund to support startups during the pandemic. That faced criticism for using taxpayer money to prop up “zombie” companies. One tech founder, writing on the industry news site Sifted, insisted the collapse of SVB was simply a “harsh lesson” and said the sector should recover under its own steam. “This was a debacle of our own making, and the UK taxpayer should not put a single penny towards bailing it out. The last thing I want is for the industry to be seen as unsustainable and held in low regard: akin to how investment bankers have been seen since the 2008 crisis.”

Jessop at the IEA also warns of the “moral hazard” risk, where companies feel encouraged to engage in questionable behaviour because they are protected against consequences.

“SVB’S UK subsidiary appears to be well capitalised and solvent … the threat of a wider contagion also seems limited,” he says. “The Government should simply ensure there is enough short-term liquidity to meet operational and cashflow needs – which seems to be the plan.”

For Sunak and Hunt, the SVB crisis poses a direct threat to their vow to turn Britain into the world’s next Silicon Valley – a dream that has already been cast into doubt by a host of promising tech companies shunning the London Stock Exchange.

Henry Whorwood at Beauhurst points to the Government’s existing exposure to the tech ecosystem through the Future Fund, Innovate UK grants and R&D tax credits, which he says provides a “very clear incentive” to intervene. The timing, however, is not good. While the Chancellor will be desperate to avoid the embarrassment of hundreds of tech firms collapsing in the week of the Budget, any decision to pump large sums of money into the tech sector at a time of economic difficulty is likely to raise eyebrows.

So, as officials scramble to keep the UK tech dream alive, they will also have to keep their feet planted firmly in reality.

“It may be hard not to feel sympathy for businesses who are facing financial disruption through no fault of their own,” says Jessop.

“But the Chancellor should do the bare minimum necessary – and no more – to protect UK customers of Silicon Valley Bank.”