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

Published

2 years ago

March 14, 2023

admin

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

Trump trade war escalation sparks global market sell-off

Published

1 day ago

April 3, 2025

admin

Trump trade war escalation sparks global market sell-off

Donald Trump’s trade war escalation has sparked a global sell-off, with US stock markets seeing the biggest declines in a hit to values estimated above $2trn.

Tech and retail shares were among those worst hit when Wall Street opened for business, following on from a flight from risk across both Asia and Europe earlier in the day.

Analysis by the investment platform AJ Bell put the value of the peak losses among major indices at $2.2trn (£1.7trn).

The tech-focused Nasdaq Composite was down 5.8%, the S&P 500 by 4.3% and the Dow Jones Industrial Average by just under 4% at the height of the declines. It left all three on course for their worst one-day losses since at least September 2022 though the sell-off later eased back slightly.

Trump latest: UK considers tariff retaliation

Analysts said the focus in the US was largely on the impact that the expanded tariff regime will have on the domestic economy but also effects on global sales given widespread anger abroad among the more than 180 nations and territories hit by reciprocal tariffs on Mr Trump‘s self-styled “liberation day”.

They are set to take effect next week, with tariffs on all car, steel and aluminium imports already in effect.

Price rises are a certainty in the world’s largest economy as the president’s additional tariffs kick in, with those charges expected to be passed on down supply chains to the end user.

The White House believes its tariffs regime will force employers to build factories and hire workers in the US to escape the charges.

Economists warn the additional costs will add upward pressure to US inflation and potentially choke demand and hiring, ricking a slide towards recession.

Apple was among the biggest losers in cash terms in Thursday’s trading as its shares fell by almost 9%, leaving it on track for its worst daily performance since the start of the COVID pandemic.

Concerns among shareholders were said to include the prospects for US price hikes when its products are shipped to the US from Asia.

Other losers included Tesla, down by almost 6% and Nvidia down by more than 6%.

Many retail stocks including those for Target and Footlocker lost more than 10% of their respective market values.

The European Union is expected to retaliate in a bid to put pressure on the US to back down.

The prospect of a tit-for-tat trade war saw the CAC 40 in France and German DAX fall by more than 3.4% and 3% respectively.

The FTSE 100, which is internationally focused, was 1.6% lower by the close – a three-month low.

Financial stocks were worst hit with Asia-focused Standard Chartered bank enduring the worst fall in percentage terms of 13%, followed closely by its larger rival HSBC.

Among the stocks seeing big declines were those for big energy as oil Brent crude costs fell back by 6% to $70 due to expectations a trade war will hurt demand.

The more domestically relevant FTSE 250 was 2.2% lower.

A weakening dollar saw the pound briefly hit a six-month high against the US currency at $1.32.

There was a rush for safe haven gold earlier in the day as a new record high was struck though it was later trading down.

Sean Sun, portfolio manager at Thornburg Investment Management, said of the state of play: “Markets may actually be underreacting, especially if these rates turn out to be final, given the potential knock-on effects to global consumption and trade.”

He warned there was a big risk of escalation ahead through countermeasures against the US.

Sandra Ebner, senior economist at Union Investment, said: “We assume that the tariffs will not remain in place in the
announced range, but will instead be a starting point for further negotiations.

“Trump has set a maximum demand from which the level of tariffs should decrease”.

She added: “Since the measures would not affect all regions and sectors equally, there will be winners and losers as in 2018 – although the losers are more likely to be in the EU than in North America.

“To protect companies in Europe from the effects of tariffs, the EU should not respond with high counter-tariffs. In any case, their impact in the US is not likely to be significant. It would be more efficient to provide targeted support to EU companies in the form of investment and stimulus.”

Business

British businesses issue warning over ‘deeply troubling’ Trump tariffs

Published

1 day ago

April 3, 2025

admin

British businesses issue warning over 'deeply troubling' Trump tariffs

British companies and business groups have expressed alarm over President Donald Trump’s 10% tariff on UK goods entering the US – but cautioned against retaliatory measures.

It comes as Business Secretary Jonathan Reynolds launched a consultation with firms on taxes the UK could implement in response to the new levies.

Money blog: Pension top-up deadline days away

A 400-page list of 8,000 US goods that could be targeted by UK tariffs has been published, including items like whiskey and jeans.

On so-called “Liberation Day”, Mr Trump announced UK goods entering the US will be subject to a 10% tax while cars will be slapped with a 25% levy.

The government’s handling of tariff negotiations with the US to date has been praised by representative and industry bodies as being “cool” and “calm” – and they urged ministers to continue that approach by not retaliating.

Business lobby group the CBI (Confederation of British Industry) said: “Retaliation will only add to supply chain disruption, slow down investment, and stoke volatility in prices”.

Industry body the British Retail Consortium (BRC) also cautioned: “Retaliatory tariffs should only be a last resort”.

‘Deeply troubling’

While a major category of exports, in the form of services – like finance and information technology (IT) – has been exempted from the tariffs, the impact on UK business is expected to be significant.

Mr Trump’s announcement was described as “deeply troubling for businesses” by the CBI’s chief executive Rain Newton-Smith.

The Federation of Small Businesses (FSB) also said the tariffs were “a major blow” to small and medium companies (SMEs), as 59% of small UK exporters sell to the US. It called for emergency government aid to help those affected.

“Tariffs will cause untold damage to small businesses trying to trade their way into profit while the domestic economy remains flat,” the FSB’s policy chair Tina McKenzie said. “The fallout will stifle growth” and “hurt opportunities”, she added.

Companies will need to adapt and overcome, the British Export Association said, but added: “Unfortunately adaptation will come at a cost that not all businesses will be able to bear.”

Watch dealer and component seller Darren Townend told Sky News the 10% hit would be “painful” as “people will buy less”.

“I am a fan of Trump, but this is nuts,” he said. “I expect some bad months ahead.”

Industry body Make UK said the 25% tariffs on cars, steel and aluminium would in particular be devastating for UK manufacturing.

Cars hard hit

Carmakers are among the biggest losers from the world trade order reshuffle.

Auto industry body the Society of Motor Manufacturers and Traders (SMMT) said the taxes were “deeply disappointing and potentially damaging measure”.

“These tariff costs cannot be absorbed by manufacturers”, SMMT chief executive Mike Hawes said. “UK producers may have to review output in the face of constrained demand”.

The new taxes on cars took effect on Thursday morning, while the measures impacting car parts are due to come in on 3 May.

Business

Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Published

1 day ago

April 3, 2025

admin

Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Economists immediately started scratching their heads when Donald Trump raised his tariffs placard in the Rose Garden on Wednesday.

On that list he detailed the rate the US believes it is being charged by each country, along with its response: A reciprocal tariff at half that rate.

So, take China for example. Donald Trump said his team had run the numbers and the world’s second-largest economy was implementing an effective tariff of 67% on US imports. The US is responding with 34%.

Trump latest: UK considers tariff retaliation

How did he come up with that 67%? This is where things get a bit murky. The US claims it studied its trading relationship with individual countries, examining non-tariff barriers as well as tariff barriers. That includes, for example, regulations that make it difficult for US exporters.

However, the actual methodology appears to be far cruder. Instead of responding to individual countries’ trade barriers, Trump is attacking those enjoying large trade surpluses with the US.

A formula released by the US trade representative laid this bare. It took the US’s trade deficit in goods with each country and divided that by imports from that country. That figure was then divided by two.

So, in the case of China, which has a trade surplus of $295bn on total US exports of $438bn, that gives a ratio of 68%. The US divided that by two, giving a reciprocal tariff of 34%.

This is a blunt measure which targets big importers to the US, irrespective of the trade barriers they have erected. This is all part of Donald Trump’s efforts to shrink the country’s deficit – although it’s US consumers who will end up paying the price.

But what about the small number of countries where the US has a trade surplus? Shouldn’t they actually be benefiting from all of this?

That includes the UK, with whom the US has a surplus (by its own calculations) of $12bn. By its own reciprocal tariff formula, the UK should be benefitting from a “negative tariff” of 9%.

Instead, it has been hit by a 10% baseline tariff. Number 10 may be breathing a sigh of relief – the US could, after all, have gone after us for our 20% VAT rate on imports, which it takes issue with – but, by Trump’s own measure, we haven’t got off as lightly as we should have.