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.
The UK economy grew by 0.1% between July and September, according to the Office for National Statistics (ONS).
However, despite the small positive GDP growth recorded in the third quarter, the economy shrank by 0.1% in September, dragging down overall growth for the quarter.
The growth was also slower than what had been expected by experts and a drop from the 0.5% growth between April and June, the ONS said.
Economists polled by Reuters and the Bank of England had forecast an expansion of 0.2%, slowing from the rapid growth seen over the first half of 2024 when the economy was rebounding from last year’s shallow recession.
And the metric that Labour has said it is most focused on – the GDP per capita, or the economic output divided by the number of people in the country – also fell by 0.1%.
Reacting to the figures, Chancellor of the Exchequer Rachel Reeves said: “Improving economic growth is at the heart of everything I am seeking to achieve, which is why I am not satisfied with these numbers,” she said in response to the figures.
“At my budget, I took the difficult choices to fix the foundations and stabilise our public finances.
“Now we are going to deliver growth through investment and reform to create more jobs and more money in people’s pockets, get the NHS back on its feet, rebuild Britain and secure our borders in a decade of national renewal,” Ms Reeves added.
The sluggish services sector – which makes up the bulk of the British economy – was a particular drag on growth over the past three months. It expanded by 0.1%, cancelling out the 0.8% growth in the construction sector
The UK’s GDP for the the most recent quarter is lower than the 0.7% growth in the US and 0.4% in the Eurozone.
The figures have pushed the UK towards the bottom of the G7 growth table for the third quarter of the year.
It was expected to meet the same 0.2% growth figures reported in Germany and Japan – but fell below that after a slow September.
The pound remained stable following the news, hovering around $1.267. The FTSE 100, meanwhile, opened the day down by 0.4%.
The Bank of England last week predicted that Ms Reeves’s first budget as chancellor will increase inflation by up to half a percentage point over the next two years, contributing to a slower decline in interest rates than previously thought.
Announcing a widely anticipated 0.25 percentage point cut in the base rate to 4.75%, the Bank’s Monetary Policy Committee (MPC) forecast that inflation will return “sustainably” to its target of 2% in the first half of 2027, a year later than at its last meeting.
The Bank’s quarterly report found Ms Reeves’s £70bn package of tax and borrowing measures will place upward pressure on prices, as well as delivering a three-quarter point increase to GDP next year.
Business
Chancellor’s Mansion House speech vows to rip up red tape – saying post-financial crash rules went ‘too far’
Chancellor Rachel Reeves has criticised post-financial crash regulation, saying it has “gone too far” – setting a course for cutting red tape in her first speech to Britain’s most important gathering of financiers and business leaders.
Increased rules on lenders that followed the 2008 crisis have had “unintended consequences”, Ms Reeves will say in her Mansion House address to industry and the City of London’s lord mayor.
“The UK has been regulating for risk, but not regulating for growth,” she will say.
It cannot be taken for granted that the UK will remain a global financial centre, she is expected to add.
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It’s anticipated Ms Reeves will on Thursday announce “growth-focused remits” for financial regulators and next year publish the first strategy for financial services growth and competitiveness.
Rachel Reeves
Bank governor to point out ‘consequences’ of Brexit
Also at the Mansion House dinner the governor of the Bank of England Andrew Bailey will say the UK economy is bigger than we think because we’re not measuring it properly.
A new measure to be used by the Office for National Statistics (ONS) – which will include the value of data – will probably be “worth a per cent or two on GDP”. GDP is a key way of tracking economic growth and counts the value of everything produced.
Brexit has reduced the level of goods coming into the UK, Mr Bailey will also say, and the government must be alert to and welcome opportunities to rebuild relations.
Mr Bailey will caveat he takes no position on “Brexit per se” but does have to point out its consequences.
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Bailey: Inflation expected to rise
In what appears to be a reference to the debate around UK immigration policy, Mr Bailey will also say the UK’s ageing population means there are fewer workers, which should be included in the discussion.
The greying labour force “makes the productivity and investment issue all the more important”.
“I will also say this: when we think about broad policy on labour supply, the economic arguments must feature in the debate,” he’s due to add.
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The exact numbers of people at work are unknown in part due to fewer people answering the phone when the ONS call.
Mr Bailey described this as “a substantial problem”.
He will say: “I do struggle to explain when my fellow [central bank] governors ask me why the British are particularly bad at this. The Bank, alongside other users, including the Treasury, continue to engage with the ONS on efforts to tackle these problems and improve the quality of UK labour market data.”
Business
Reeves has welcome support from Bank’s governor as she goes for growth and seeks to woo City
When Gordon Brown delivered his first Mansion House speech as chancellor he caused a stir by doing so in a lounge suit, rather than the white tie and tails demanded by convention.
Some 27 years later Rachel Reeves is the first chancellor who would have not drawn a second glance had they addressed the City establishment in a dress.
As the first woman in the 800-year history of her office, Ms Reeves’s tenure will be littered with reminders of her significance, but few will be as symbolic as a dinner that is a fixture of the financial calendar.
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Her host at Mansion House, asset manager Alastair King, is the 694th man out of 696 Lord Mayors of London. The other guest speaker, Bank of England governor Andrew Bailey, leads an institution that is yet to be entrusted to a woman.
Ms Reeves’s speech indicates she wants to lean away from convention in policy as well as in person.
By committing to tilting financial regulation in favour of growth rather than risk aversion, she is going against the grain of the post-financial crash environment.
“This sector is the crown jewel in our economy,” she will tell her audience – many of whom will have been central players in the 2007-08 collapse.
Sending a message that they will be less tightly bound in future is not natural territory for a Labour chancellor.
Her motivation may be more practical than political. A tax-and-spend budget that hit business harder than forewarned has put her economic program on notice and she badly needs the growth elements to deliver.
Rachel Reeves on budget day. Pic: PA
Her plans to consolidate local authority pension schemes so they might match the investing power of their Canadian and Australian counterparts is part of the same theme.
Infrastructure investment is central to Reeves’s plan and these steps, universally welcomed, could unlock the private sector funding required to make it happen.
Bank governor frank on Brexit and growth
If the jury is out in a business financial community absorbing £25bn in tax rises, she has welcome support from Mr Bailey.
He is expected to deliver some home truths about the economic inheritance in plainer language than central bankers sometimes manage.
Britain’s growth potential, he says, “is not a good story”. He describes the labour market as “running against us” in the face of an ageing population.
With investment levels “particularly weak by G7 standards”, he will thank the chancellor for the pension reforms intended to unlock capital investment.
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Governor warns inflation expected to rise
He is frank about Brexit too, more so than the chancellor has dared.
While studiously offering no view on the central issue, Mr Bailey says leaving the EU had slowed the UK’s potential for growth, and that the government should “welcome opportunities to rebuild relations”.
There is a more coded warning too about the risks of protectionism, which is perhaps more likely with Donald Trump in the White House.
“Amid threats to economic security, let’s please remember the importance of openness,” the Bank governor will say.
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All that is welcome for Ms Reeves.
Already a groundbreaking chancellor, she is aiming for a political and economic legacy that extends beyond her gender and the dress code.
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