The social media-driven run on Silicon Valley Bank has repercussions on many fronts

Published

2 years ago

March 14, 2023

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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.

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.

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.

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.

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.

Business

Octopus Energy sparks £10bn demerger of tech arm Kraken

Published

18 hours ago

July 5, 2025

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Octopus Energy sparks £10bn demerger of tech arm Kraken

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.

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.

Business

Ryanair urges EU chief to ‘quit’ over air traffic strike disruption

Published

2 days ago

July 4, 2025

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Ryanair urges EU chief to 'quit' over air traffic strike disruption

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?

“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.

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.

Business

Ryanair and easyJet cancel hundreds of flights over air traffic control strike

Published

3 days ago

July 3, 2025

admin

Ryanair and easyJet cancel hundreds of flights over air traffic control strike

Ryanair and easyJet have cancelled hundreds of flights as a French air traffic controllers strike looms.

Ryanair, Europe’s largest airline by passenger numbers, said it had axed 170 services amid a plea by French authorities for airlines to reduce flights at Paris airports by 40% on Friday.

EasyJet said it was cancelling 274 flights during the action, which is due to begin later as part of a row over staffing numbers and ageing equipment.

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The owner of British Airways, IAG, said it was planning to use larger aircraft to minimise disruption for its own passengers.

The industrial action is set to affect all flights using French airspace, leading to wider cancellations and delays across Europe and the wider world.

Ryanair said its cancellations, covering both days, would hit services to and from France, and also flights over the country to destinations such as the UK, Greece, Spain and Ireland.

Group chief executive Michael O’Leary has campaigned for a European Union-led shake-up of air traffic control services in a bid to prevent such disruptive strikes, which have proved common in recent years.

He described the latest action as “recreational”.

“Once again, European families are held to ransom by French air traffic controllers going on strike,” he said.

“It is not acceptable that overflights over French airspace en route to their destination are being cancelled/delayed as a result of yet another French ATC strike.

“It makes no sense and is abundantly unfair on EU passengers and families going on holidays.”

Ryanair is demanding the EU ensure that air traffic services are fully staffed for the first wave of daily departures, as well as to protect overflights during national strikes.

“These two splendid reforms would eliminate 90% of all ATC delays and cancellations, and protect EU passengers from these repeated and avoidable ATC disruptions due to yet another French ATC strike,” Mr O’Leary added.