Relief in the UK over Silicon Valley Bank. Panic in the US
The good news is that it took only a long weekend to find a fix – a good one – for the UK end of the doomed Silicon Valley Bank. Our tech executives can stop writing emotional pleas to the chancellor about their unique importance to the nation’s prosperity. The bad news is that US regulators’ solution for the very much larger parent bank raised more questions than it answered. The fallout from the failure of SVB, plus the closure of Signature Bank, could get a lot worse yet.
Let’s start with the positive, though. The sale of SVB’s UK subsidiary to HSBC for £1 is satisfactory from almost every angle. The customers will pass to Europe’s biggest bank, a haven they might have chosen before their cash was trapped at the end of last week. They now have immediate access to their money. The Treasury will be delighted that it has avoided putting public funds at risk. The likely plan B, involving lines of credit to the SVB UK’s customers, sounded horribly messy.
And for the Bank of England, the ending is excellent advertising. The post-crash regulatory reforms imposed tougher capitalisation requirements on the UK subsidiaries of foreign banks, and in this instance they seem to have worked.
We don’t know if the governor had to twist HSBC’s arm, but perhaps he didn’t: for its single pound, the buyer said it was getting a UK banking operation with tangible equity expected to be about £1.4bn. The figure is subject to adjustment but for HSBC – for whom SVB UK’s loans of £5.5bn and deposits of £6.7bn are a drop in the ocean – it’s worth a punt. This is not like Lloyds TSB shooting itself in the foot by rescuing HBOS in 2008.
Very good, but the US picture is alarming. SVB’s shareholders were always going to be wiped out, but in opting for a full bailout of SVB’s depositors, the US Federal Reserve and other regulators have sent several connected messages, few of them positive.
First, they have endorsed the idea that SVB posed a systemic threat and so only a belt-and-braces response would do. That judgment may be justified on short-term pragmatic grounds, but the long-term implications are huge. The stance indicates, as Joe Biden suggested, that the US will have to retighten rules on second- and third-tier banks. If the 16th largest US bank had the potential to cause chaos, shouldn’t it have been more firmly under the microscope in the first place?
Second, the lighter-touch regime for the likes of SVB seems to have been not so much light as nonexistent. SVB failed from basic risk-management flaws. The bank had an overabundance of deposits and took a punt on longdated US debt that promptly fell in value when interest rates rose. The bank was chasing a little bit of extra income at the risk of calamity if deposits fell and it had to sell chunks of its bond portfolio and thereby crystallise losses. A wide-awake regulator, one would hope, would have spotted the risk a mile off. The obvious question is what else has been missed elsewhere.
Third, the Fed has aroused the suspicion that SVB depositors got special treatment because they are wellconnected venture capitalists. Silicon Valley – the community, as opposed to the bank – begged to be spared, and regulators obliged.
If all depositors in all small banks – not just those within the insured $250,000 (£205,000) threshold – are also to be protected in all circumstances, that represents a fundamental change in regulatory philosophy. Given the uncertainty, the plunge on Monday in the share prices of many US regional banks was understandable: the market is grasping for clarity and fears more bank run-ins.
And the other unintended consequence is that financial markets now do not know what to think about interest rates. Only a week ago, the Fed chairman, Jerome Powell, was saying rates would have to increase in coming months to tame inflation. Now investors wonder if the hikes will be deferred or not happen at all, in the interests of financial stability. From a policymaking perspective, the position is suboptimal, to put it mildly.
Look forward a week and it is possible – just about – that the picture could look brighter. The Fed has other tools at its disposal, besides the emergency funding measures for banks also unveiled at the weekend. But we also know that share prices of US regional banks do not crash by extraordinary percentages – 66% for San Francisco’s First Republic at the start of trading – unless fear is real. Well played, the Bank of England. Unfortunately, the real action lies elsewhere.
A wide-awake regulator, one would hope, would have spotted the risk a mile off. The obvious question is what else has been missed elsewhere