The social media-driven run on Silicon Valley Bank has repercussions on many fronts
While there will be huge relief at HSBC’s rescue of Silicon Valley Bank’s (SVB) UK arm, sparing the UK tech sector from a body blow, this story has a long way to run.
The repercussions will be felt for some time, particularly in the United States, where Silicon Valley Bank was the country’s 16th largest lender and a mainstay of providing banking services for the tech sector.
Already the knock-on effects of what has happened are being felt in the US dollar itself.
The greenback has weakened against other major currencies because there is a view in the market that, with SVB’s collapse having raised broader concerns about the overall resilience of the banking sector, the US Federal Reserve is going to have to slow the pace at which it has been raising interest rates.
That has also been shown in the violent rally in the value of US government bonds (Treasuries) on Monday.
The market had been assuming the Fed would raise its main policy rate next week by another quarter point. Some market participants, such as the influential economics team at Goldman Sachs, now expect no change.
That, in turn, has sent shares of a number of major US lenders lower, including Bank of America and Wells Fargo, as well as a host of smaller regional lenders.
These include First Republic Bank, a small lender which revealed on Sunday evening that it has received funding from both the Fed itself and also JP Morgan Chase, America’s biggest bank.
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‘Our banking system is safe’
First Republic Bank’s shares fell by 71% in pre-market trading while other regional lenders, including Western Alliance Bancorp and PacWest Bancorp, have also seen their shares fall.
While the US and UK governments have acted quickly to shore up confidence in the banking sectors, investors will nonetheless be nervous about the profitability of the sector, particularly if interest rates stop rising so rapidly.
The repercussions are also being felt on this side of the Atlantic, too, with market expectations for the extent to which the European Central Bank will be able to raise interest rates this year also moderating.
Accordingly, shares of some big European lenders have fallen sharply including the likes of Commerzbank, Germany’s second largest lender and Sabadell, the Spanish parent of TSB. In the UK, shares of all the big lenders are sharply lower, too.
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US authorities step in to protect deposits
Even though fears about possible contagion in the financial services sector have been largely put to bed, there will nonetheless be other questions.
Chief among these will be for US financial regulators.
This was the biggest banking collapse since the global financial crisis but there were subtle differences from what happened then. On that occasion, banks like Lehmans had balance sheets stuffed with securities that proved to be of an inferior quality than was implied by the credit rating of those securities, for example mortgage-backed securities that, instead of being backed by high quality loans, were actually backed by sub-prime mortgages.
SVB could not have been more different. For a start, on the face of it, it looked to be well capitalised and profitable. It also did not appear to be behaving recklessly.
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‘The best possible outcome for the UK tech sector’
Normal banking practice sees banks take money from depositors and lend it out to borrowers at a higher rate or deposit it in interest-bearing securities. However, in the case of SVB, it was taking deposits from its customers at a much faster rate than it could lend that money out.
Accordingly, having taken in vast sums from its clients in the tech sector, it then reinvested most of those deposits in US Treasury bonds which, in theory, are among the safest financial investments in the world. This, in principle, is precisely the kind of prudent behaviour that financial regulators around the world would applaud and especially in the wake of the financial crisis.
In practice, though, it was a strategy that blew up when the Fed began raising interest rates in response to inflation.
US Treasuries have repriced during the last year more aggressively than they have done in decades.
Take 2-year US Treasuries. The yield (which moves in the opposite direction to the price) rocketed from 0.732% at the beginning of 2022 to 5.084% on Wednesday last week, a level not seen since 2007, spelling trouble for anyone – like SVB – with an investment portfolio heavily concentrated in such assets. So regulators are going to be under pressure to make sure this does not happen again.
While lenders on both sides of the Atlantic have been subjected to regular stress tests since the global financial crisis, those stress tests have tended to involve scenarios like recessions and housing market collapses, rather than a sell-off in one of the world’s least risky financial assets.
It seems highly likely that, in future, banks will be required to hold a bigger portion of capital not in Treasuries but in cash.
This will, of course, have the effect of reducing their profitability.
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SVB UK sale shows ‘great resilience in UK’
There will also be implications for the way in which the tech sector and the venture capitalists who support it operate.
The former are going to come under greater pressure from their investors to consider more deeply what, on the face of it, are considered to be relatively mundane issues such as cash management. Tech start-ups, rather than being directed towards a specialist lender like SVB, are also more likely in future to gravitate back towards more traditional lenders – a possibility which may well have informed HSBC’s decision to buy SVB UK.
Among the most interesting facets of this saga has been the difference in the approaches taken by the UK and US governments.
Here, the UK opted for a private sector solution in seeking to try and find a buyer for SVB UK, rather than see the business tipped into an insolvency process. In the US, the government has adopted a public sector approach, with the Federal Deposit Insurance Corporation effectively backstopping depositors. Joe Biden, the US president, approvingly retweeted a tweet from the New York Times this morning which used the term ‘bail-out’.
However, this was only a bailout for SVB’s depositors, as shareholders and bondholders in SVB have effectively been wiped out.
And that, in its own way, is just as Darwinian as the UK solution.
As Bill Ackman, the noted US hedge fund manager, noted: “Our government did the right thing. This was not a bailout in any form. The people who screwed up will bear the consequences. The investors who didn’t adequately oversee their banks will be zeroed out and the bondholders will suffer a similar fate.
“Importantly, our government has sent a message that depositors can trust the banking system. Without this confidence, we are left with three or possibly four too-big-to-fail banks where the taxpayer is explicitly on the hook, and our national system of community and regional banks is toast.”
Perhaps the biggest lesson of all is that, in an age of smartphones and social media, even the most robust of banks can find themselves undermined. SVB’s problems began when some investors got wind of a possible equity fund-raising.
Then, in the tight-knit world of the US tech sector, depositors began withdrawing their capital, among them Founders Fund, the venture capital fund co-founded by the influential investor Peter Thiel.
And that, in itself, is a huge irony. Venture capital firms try to back portfolio companies over the very long term. SVB was trusted by them, accordingly, to support their clients over the long term. However, in its hour of need, SVB found itself let down in the short term by the very investors who it had apparently supported over the long term.
The VCs and their portfolio companies pulled their money from SVB because they had lost trust in the bank.
In that sense, this was a bank run not so different from any other.
You probably recall the stories about Leicester’s clothing industry in recent years: grim labour conditions, pay below the minimum wage, “dark factories” serving the fast fashion sector. What is less well known is what happened next. In short, the industry has cratered.
In the wake of the recurrent scandals over “sweatshop” conditions in Leicester, the majority of major brands have now abandoned the city, triggering an implosion in production in the place that once boasted that it “clothed the world”.
And now Leicester faces a further existential double-threat: competition from Chinese companies like Shein and Temu, and the impending arrival of cheap imports from India, following the recent trade deal signed with the UK. Many worry it could spell an end for the city’s fashion business altogether.
Gauging the scale of the recent collapse is challenging because many of the textile and apparel factories in Leicester are small operations that can start up and shut down rapidly, but according to data provided to Sky News by SP&KO, a consultancy founded by fashion sector veterans Kathy O’Driscoll and Simon Platts, the number has fallen from 1,500 in 2017 to just 96 this year. This 94% collapse comes amid growing concerns that British clothes-making more broadly is facing an existential crisis.
A trade fair tries to reignite enthusiasm for the local clothing industry
More on this story:
The modern slaves making our clothes in Leicester
How Leicester’s textile workers are being exploited
Boohoo failed in Leicester supply chain malpractice
In an in-depth investigation carried out over recent months, Sky News has visited sites in the city shut down in the face of a collapse of demand. Thousands of fashion workers are understood to have lost their jobs. Many factories lie empty, their machines gathering dust.
The vast majority of high street and fast fashion brands that once sourced their clothes in Leicester have now shifted their supply chains to North Africa and South Asia.
And a new report from UKFT – Britain’s fashion and textiles lobby group – has found that a staggering 95% of clothes companies have either trimmed or completely eliminated clothes manufacturing in the UK. Some 58% of brands, by turnover, now have an explicit policy not to source clothes from the UK.
Seamstresses in one of the city’s former factories
Clothing industry workers in Leicester
Jenny Holloway, chair of the Apparel & Textile Manufacturers Association, said: “We know of factories that were asked to become a potential supplier [to high street brands], got so far down the line, invested on sampling, invested time and money, policies, and then it’s like: ‘oh, sorry, we can’t use you, because Leicester is embargoed.'”
Tejas Shah, a third-generation manufacturer whose family company Shahtex used to make materials for Marks & Spencer, said: “I’ve spoken to brands in the past who, if I moved my factory 15 miles north into Loughborough, would be happy to work with me. But because I have an LE1, LE4 postcode, they don’t want to work for me.”
Shahtex in Leicester used to make materials for Marks & Spencer
Tejas Shah, of Leicester-based firm Shahtex
Threat of Chinese brands Shein and Temu
That pain has been exacerbated by a new phenomenon: the rise of Chinese fast fashion brands Shein and Temu.
They offer consumers ultra-cheap clothes and goods, made in Chinese factories and flown direct to UK households. And, thanks to a customs loophole known as “de minimis”, those goods don’t even incur tariffs when they arrive in the country.
An online advert for Chinese fast fashion company Shein
According to Satvir Singh, who runs Our Fashion, one of the last remaining knitwear producers in the city, this threat could prove the final straw for Leicester’s garments sector.
“It is having an impact on our production – and I think the whole retail sector, at least for clothing, are feeling that pinch.”
Inside one of the city’s remaining clothesmakers
While Donald Trump has threatened to abolish the loophole in the US, the UK has only announced a review with no timeline.
“If we look at what Trump’s done, he’s just thinking more about his local economy because he can see the long-term effects,” said Mr Singh. “I think [abolishing de minimis exceptions] will make a huge difference. I think ultimately it’s about a level playing field.”
A spokesperson for Temu told Sky News: “We welcome UK manufacturers and businesses to explore a low-cost way to grow with us. By the end of 2025, we expect half our UK sales to come from local sellers and local warehouses.”
Thames Water, the UK’s biggest water provider, has been hit by a record fine by regulator Ofwat.
The company has been fined £122.7m following Ofwat’s “biggest and most complex” investigation.
It follows two investigations related to Thames Water’s wastewater operations and dividend payouts.
Of the total fine, £104.5m – 9% of Thames Water‘s turnover – has been levied for breaches of wastewater rules – just below the maximum 10% of turnover that Ofwat could have applied.
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Pic: istock
Another £18.2m penalty will be paid for breaches of dividend payment rules.
It is the first time Ofwat has fined a company for shareholders’ payments which do not “properly reflect” its performance for customers and the environment.
The fine will be paid by Thames Water and its shareholders, Ofwat said, rather than customers.
‘Unacceptable’ environmental impact
The regulator was highly critical of Thames Water’s handling of wastewater, describing it as having an “unacceptable” impact on the environment.
Its investigation of treatment works and the wider wastewater network uncovered failings which “amounted to a significant breach of the company’s legal obligations” and caused that unacceptable environmental impact.
The company announced a 40% spike in sewage spills in December for the period from January to September 2024.
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Thames Water boss can ‘save’ company
The fine was so large because Ofwat’s chief executive, David Black, said Thames Water “failed to come up with an acceptable redress package that would have benefited the environment”.
“This is a clear-cut case where Thames Water has let down its customers and failed to protect the environment,” Mr Black said.
“Our investigation has uncovered a series of failures by the company to build, maintain and operate adequate infrastructure to meet its obligations.”
As a result, Thames Water is required to agree to a remediation plan with Ofwat within six months.
Another investigation by the Environment Agency into environmental permits at sewage treatment works is ongoing.
Bad news for Thames Water finances
Thames Water serves 16 million customers across London and the South East and has just about fended off effective nationalisation, having secured an emergency £3bn loan. Its debts now top £19bn.
These fines were not factored into Thames Water’s financial planning for the next five years. The company’s chief executive, Chris Weston, told a recent sitting of the Environment, Food and Rural Affairs select committee that Thames Water’s future was dependent on Ofwat being lenient with fines.
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A Thames Water spokesperson said: “We take our responsibility towards the environment very seriously and note that Ofwat acknowledges we have already made progress to address issues raised in the investigation relating to storm overflows.
“The dividends were declared following a consideration of the company’s legal and regulatory obligations. Our lenders continue to support our liquidity position and our equity raise process continues.”
You probably recall the stories about Leicester’s clothing industry in recent years: grim labour conditions, pay below the minimum wage, “dark factories” serving the fast fashion sector. What is less well known is what happened next. In short, the industry has cratered.
In the wake of the recurrent scandals over “sweatshop” conditions in Leicester, the majority of major brands have now abandoned the city, triggering an implosion in production in the place that once boasted that it “clothed the world”.
And now Leicester faces a further existential double-threat: competition from Chinese companies like Shein and Temu, and the impending arrival of cheap imports from India, following the recent trade deal signed with the UK. Many worry it could spell an end for the city’s fashion business altogether.
Gauging the scale of the recent collapse is challenging because many of the textile and apparel factories in Leicester are small operations that can start up and shut down rapidly, but according to data provided to Sky News by SP&KO, a consultancy founded by fashion sector veterans Kathy O’Driscoll and Simon Platts, the number has fallen from 1,500 in 2017 to just 96 this year. This 94% collapse comes amid growing concerns that British clothes-making more broadly is facing an existential crisis.
More on this story:
The modern slaves making our clothes in Leicester
How Leicester’s textile workers are being exploited
Boohoo failed in Leicester supply chain malpractice
In an in-depth investigation carried out over recent months, Sky News has visited sites in the city shut down in the face of a collapse of demand. Thousands of fashion workers are understood to have lost their jobs. Many factories lie empty, their machines gathering dust.
The vast majority of high street and fast fashion brands that once sourced their clothes in Leicester have now shifted their supply chains to North Africa and South Asia.
And a new report from UKFT – Britain’s fashion and textiles lobby group – has found that a staggering 95% of clothes companies have either trimmed or completely eliminated clothes manufacturing in the UK. Some 58% of brands, by turnover, now have an explicit policy not to source clothes from the UK.
Seamstresses in one of the city’s former factories
Clothing industry workers in Leicester
Jenny Holloway, chair of the Apparel & Textile Manufacturers Association, said: “We know of factories that were asked to become a potential supplier [to high street brands], got so far down the line, invested on sampling, invested time and money, policies, and then it’s like: ‘oh, sorry, we can’t use you, because Leicester is embargoed.'”
A trade fair tries to reignite enthusiasm for the local clothing industry
Tejas Shah, a third-generation manufacturer whose family company Shahtex used to make materials for Marks & Spencer, said: “I’ve spoken to brands in the past who, if I moved my factory 15 miles north into Loughborough, would be happy to work with me. But because I have an LE1, LE4 postcode, they don’t want to work for me.”
Shahtex in Leicester used to make materials for Marks & Spencer
Tejas Shah, of Leicester-based firm Shahtex
Threat of Chinese brands Shein and Temu
That pain has been exacerbated by a new phenomenon: the rise of Chinese fast fashion brands Shein and Temu.
They offer consumers ultra-cheap clothes and goods, made in Chinese factories and flown direct to UK households. And, thanks to a customs loophole known as “de minimis”, those goods don’t even incur tariffs when they arrive in the country.
An online advert for Chinese fast fashion company Shein
According to Satvir Singh, who runs Our Fashion, one of the last remaining knitwear producers in the city, this threat could prove the final straw for Leicester’s garments sector.
“It is having an impact on our production – and I think the whole retail sector, at least for clothing, are feeling that pinch.”
Inside one of the city’s remaining clothesmakers
While Donald Trump has threatened to abolish the loophole in the US, the UK has only announced a review with no timeline.
“If we look at what Trump’s done, he’s just thinking more about his local economy because he can see the long-term effects,” said Mr Singh. “I think [abolishing de minimis exceptions] will make a huge difference. I think ultimately it’s about a level playing field.”
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