How Silicon Valley Bank chaos has had a bearing on us all – and why we’re in for a bumpy few months
Tempting as it is to believe that the chaos with Silicon Valley Bank and its British arm are of interest only to members of the tech community and financial nerds, it has already had a very real bearing on all our lives.
For evidence, look no further than the money markets, where investors bet on the future path of interest rates.
Up until last Friday, they were expecting UK interest rates to peak at around 4.75% – possibly even a little bit higher.
But the shock of the bank collapse caused a sudden reappraisal. By Monday evening, they were pricing in a peak of only 4.25% – a very big fall by the scheme of these things. It was a similar story in the US, where the expected peak for rates dropped by around half a percentage point.
Why are these two stories – interest rates and an obscure bank collapse – colliding?
In large part it’s because they were always intertwined – not that anyone paid much attention before last week.
Part of the reason Silicon Valley Bank (SVB) suffered its demise was because over the past 18 months rising interest rates had caused a sharp fall in the value of bonds held by the bank.
It was, in large part, those losses and the impact on SVB’s balance sheet that prompted depositors to run from the bank late last week (which in turn triggered the UK branch’s collapse).
In other words, one of the consequences of SVB’s implosion is that the Federal Reserve and Bank of England might become a little more wary of raising interest rates in future.
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Everyone knew there were unexploded bombs in the financial system which would begin to explode when money got more expensive; the fear now is that there may be more explosions to come.
This isn’t the only explanation for why rate expectations have come down. There’s also the fact that the chaos at SVB, Signature bank (which also failed) and across much of the US banking system might dampen economic growth or even precipitate a recession.
And, for the most part, central banks tend to cut rates rather than raise them in the face of a recession. And we were already getting close to the potential peak in borrowing costs.
Even so, this interplay between an extremely nervous financial system and interest rates is a big part of the story.
Which brings us to some of the consequences.
‘Things could get pretty gritty’
Let’s assume the Fed and the Bank of England are indeed going to allow interest rates to peak at a lower rate than previously expected.
Does that mean that we have to expect higher inflation in future? What if inflation turns out to be considerably more sticky than most central banks expect (they mostly think it’ll come down pretty quickly)?
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Biden on Silicon Valley Bank collapse
The short answer is that things could get pretty gritty: the Bank of England is duty bound to try to keep inflation low and to try to keep the financial system stable, but among the many things illustrated by the SVB episode is that those two objectives can sometimes clash with each other.
In this case, higher interest rates (to fight inflation) contributed to financial instability. Yes, there was lots else going on besides – there’s a strong case to say the Fed wasn’t doing enough to monitor the risk posed by unusual banks like SVB – but the rising cost of money is a big part of the story.
There’s good news and bad news
If inflation does stay a lot higher than the central banks expect, then we could be in for a more turbulent time.
And how worried should we be about that? The next few months will tell, but for the time being there’s good and bad news.
The good is that the headline consumer price index in both the UK and US seems to have been faring more or less as the central banks expected – gradually coming down. Earlier today, the US CPI came in at an annual rate of 6% – bang in line with expectations.
The bad news is that when you look beneath the surface, there are some hints that inflation could prove more stubborn than expected.
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In particular, core inflation – the behaviour of prices once you strip out volatile items like energy and food – is still building, especially when you ignore housing costs. That suggests there’s still upwards pressure on prices.
And sure enough, immediately after the release of those numbers, interest rate expectations rose a little, both in the UK and US.
Now, UK rates are expected to peak not at 4.25% but 4.4% (which in practical terms means a fair few people – though not everyone – expect 4.5% rates).
In short, we’re in for a bumpy few months.
Octopus Energy Group, Britain’s largest residential gas and electricity supplier, is plotting a £10bn demerger of its technology arm that would reinforce its status as one of the country’s most valuable private companies.
Sky News can exclusively reveal that Octopus Energy is close to hiring investment bankers to help formally separate Kraken Technologies from the rest of the group.
The demerger, which would be expected to take place in the next 12 months, would see Octopus Energy’s existing investors given shares in the newly independent Kraken business.
A minority stake in Kraken of up to 20% is expected to be sold to external shareholders in order to help validate the technology platform’s valuation, according to insiders.
One banking source said that Kraken could be valued at as much as $14bn (£10.25bn) in a forthcoming demerger.
Citi, Goldman Sachs, JP Morgan and Morgan Stanley are among the investment banks invited to pitch for the demerger mandate in recent weeks.
A deal will augment Octopus Energy chief executive Greg Jackson’s paper fortune, and underline his success at building a globally significant British-based company over the last decade.
Octopus Energy now has 7.5m retail customers in Britain, following its 2022 rescue of the collapsed energy supplier Bulb, and the subsequent acquisition of Shell’s home energy business.
In January, it announced that it had become the country’s biggest supplier – surpassing Centrica-owned British Gas – with a 24% market share.
It also has a further 2.5m customers outside the UK.
Kraken is an operating system licensed to other energy providers, water companies and telecoms suppliers. Pic: Octopus
Sources said a £10bn valuation of Kraken would now imply that the whole group, including the retail supply business, was worth in the region of £15bn or more.
That would be double its valuation of just over a year ago, when the company announced that it had secured new backing from funds Galvanize Climate Solutions and Lightrock.
Shortly before that, former US vice president Al Gore’s firm, Generation Investment Management, and the Canada Pension Plan Investment Board increased their stakes in Octopus Energy in a transaction valuing the company at $9bn (£7.2bn).
Kraken is an operating system which is licensed to other energy providers, water companies and telecoms suppliers.
It connects all parts of the energy system, including customer billing and the flexible management of renewable generation and energy devices such as heat pumps and electric vehicle batteries.
The business also unlocks smart grids which enable people to use more renewable energy when there is an abundant supply of it.
In the UK, its platform is licensed to Octopus Energy’s rivals EON and EDF Energy, as well as the water company Severn Trent and broadband provider Cuckoo.
Overseas, Kraken serves Origin Energy in Australia, Japan’s Tokyo Gas and Plentitude in countries including France and Greece.
Its biggest coup came recently, when it struck a deal with National Grid in the US to serve 6.5m customers in New York and Massachusetts.
Sources said other major licensing agreements in the US were expected to be struck in the coming months.
Kraken, which is chaired by Gavin Patterson, the former BT Group chief executive, is now contracted to more than 70m customer accounts globally – putting it easily on track to hit a target of 100m by 2027.
Earlier this year, Mr Jackson said that target now risked being seen as “embarrassingly unambitious”.
Last July, Kraken recruited Amir Orad, a former boss of NICE Actimize, a US-listed provider of enterprise software to global banks and Fortune 500 companies, as its first chief executive.
A demerger of Kraken will trigger speculation about an eventual public market listing of the business.
Its growth in the US, and the relative public market valuations of technology companies in New York and London, may put the UK at a disadvantage when Kraken eventually considers where to list.
One key advantage of demerging Kraken from the rest of Octopus Energy Group would be to remove the perception of a conflict of interest among potential customers of the technology platform.
A source said the unified corporate ownership of both businesses had acted as a deterrent to some energy suppliers.
Kraken has also diversified beyond the energy sector, and earlier this year joined a consortium which was exploring a takeover bid for stricken Thames Water.
This weekend, Octopus Energy declined to comment.
The boss of Ryanair has told Sky News the president of the European Commission should “quit” if she can’t stop disruption caused by repeated French air traffic control strikes.
Michael O’Leary, the group chief executive of Europe’s largest airline by passenger numbers, said in an interview with Business Live that Ursula von der Leyen had failed to get to grips, at an EU level, with interruption to overflights following several recent disputes in France.
The latest action began on Thursday and is due to conclude later today, forcing thousands of flights to be delayed and cancelled through French airspace closures.
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Mr O’Leary told presenter Darren McCaffrey that French domestic flights were given priority during ATC strikes and other nations, including Italy and Greece, had solved the problem through minimum service legislation.
He claimed that the vast majority of flights, cancelled over two days of action that began on Thursday, would have been able to operate under similar rules.
Mr O’Leary said of the EU’s role: “We continue to call on Ursula von der Leyen – why are you not protecting these overflights, why is the single market for air travel being disrupted by a tiny number of French air traffic controllers?
Ryanair has cancelled more than 400 flights over two days due to the action in France. File pic: PA
“All we get is a shrug of their shoulders and ‘there’s nothing we can do’. We point out, there is.”
He added: “We are calling on Ursula von der Leyen, who preaches about competitiveness and reforming Europe, if you’re not willing to protect or fix overflights then quit and let somebody more effective do the job.”
The strike is estimated, by the Airlines for Europe lobby group to have led to at least 1,500 cancelled flights, leaving 300,000 travellers unable to make their journeys.
Michael O’Leary believes the EU can take action on competition grounds. Pic: PA
Ryanair itself had axed more than 400 flights so far, Mr O’Leary said. Rival easyJet said on Thursday that it had cancelled 274 services over the two days.
The beginning of July marks the start of the European summer holiday season.
The French civil aviation agency DGAC had already told airlines to cancel 40% of flights covering the three main Paris airports on Friday ahead of the walkout – a dispute over staffing levels and equipment quality.
Mr O’Leary described those safety issues as “nonsense” and said twhile the controllers had a right to strike, they did not have the right to close the sky.
DGAC has warned of delays and further severe disruption heading into the weekend.
Many planes and crews will be out of position.
Mr O’Leary is not alone in expressing his frustration.
The French transport minister Philippe Tabarot has denounced the action and the reasons for it.
“The idea is to disturb as many people as possible,” he said in an interview with CNews.
Passengers are being advised that if your flight is cancelled, the airline must either give you a refund or book you on an alternative flight.
If you have booked a return flight and the outbound leg is cancelled, you can claim the full cost of the return ticket back from your airline.
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