HSBC has acquired the UK subsidiary of Silicon Valley Bank for £1 ($1.2).
“This acquisition makes excellent strategic sense for our business in the UK,” HSBC chief executive Noel Quinn said on Monday.
UK Chancellor Jeremy Hunt confirmed that all customer deposits had been protected under the deal, with no taxpayer cash involved.
The move ensures the security of about 3,000 customers holding £6.7 billion ($8.1 billion) of deposits.
It comes after the US government moved to stop a potential banking crisis following the collapse of Silicon Valley Bank, with all deposits protected, amid fears that the factors that caused the California-based bank to fail could spread.
In a sign of how fast events were moving, US regulators announced that New York-based Signature Bank had also failed and was being seized on Sunday.
With more than $110 billion in assets, Signature Bank is the third largest bank failure in US history.
In the UK, many were breathing a sigh of relief on Monday that a buyer had been found for SVB's UK arm following a weekend of intense activity.
“Today, the government and the Bank of England have facilitated a private sale of Silicon Valley Bank UK. This ensures customer deposits are protected and can bank as normal, with no taxpayer support,” Mr Hunt said.
“I am pleased we have reached a resolution in such short order. HSBC is Europe's largest bank, and SVB UK customers should feel reassured by the strength, safety and security that brings them.
“When you have very young companies, very promising companies, they're also fragile. They need to pay their staff and they were worried that as of 8am this morning, they might literally not be able to access their bank account.
“For that reason, we were faced with a situation where we could have seen some of our most important companies, our most strategic companies, wiped out and that would have been extremely dangerous.”
Mr Hunt also stressed that the broader banking system was robust and not under any kind of threat.
“What I would say is the Bank of England is very clear — the UK banking system is extremely secure; it's well capitalised.
“And I think we demonstrated that resilience by what was happening over the weekend and the fact that we were able to come up with a solution so quickly.”
Nightmare of uncertainty
Analysts said the deal should end the nightmare of uncertainty that hundreds of UK technology companies had been experiencing over the past few days.
“HSBC shareholders may have some concerns about the bank snapping up assets which have been under such a cloud of uncertainty, particularly the exposure to bonds, but HSBC says it expects a gain to arise from the acquisition,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“This will be hugely welcomed by the government, given the looming crisis risked overshadowing Budget Day [on Wednesday], as a big tech sector bailout would not have been a good look when millions have been told there is little extra money to ease the cost-of-living crisis.”
Not everyone was pleased with the HSBC deal though. The Bank of London, a UK digital clearing bank that had also put forward a rescue bid for SVB UK, criticised the sale to HSBC as a “missed opportunity”.
“For many, this will be seen as a missed opportunity to support competition and innovation,” the Bank of London said.
“It cannot be right that, once again, the heritage banks that have provided a poor service to UK entrepreneurs over many years benefit from their already dominant position.”
“Britain needs better. For our part, we at The Bank of London stand ready to serve the entrepreneurial community of the UK.”
Meanwhile, opposition Labour shadow chancellor Rachel Reeves said: “That SVB has a buyer will be a relief to the entrepreneurs and the thousands of people working in the tech and start-up sectors, who woke up facing huge uncertainty this morning.”
“Tech and life sciences are vital to getting our economy growing again,” she said.
On Monday, more than 40 companies listed on the London stock exchange began updating their shareholders on their exposures to Silicon Valley Bank and its UK arm.
The publishing group, Future, which is behind such titles as Marie Claire and PC Gamer, said it had £1 million in the bank, but that is less than 3 per cent of its total cash on hand.
SVB also provided £50 million of Future's £900 million loan facilities, with about half already drawn.
Although the greetings card company, Moonpig has “no material exposure”, no account and no cash with SVB UK, it had a promise of a £13 million loan, but has yet to draw on that.
Pharming, a Netherlands' biotech company said it was continuing to “actively monitor the situation, including with respect to its $19 million in deposits at Silicon Valley Bank UK Limited”.
What went wrong?
Really, until a few weeks ago, Silicon Valley Bank was very much the bank of choice for US high-tech entrepreneurs and venture capitalists. Some of the technology sector's biggest names, such as Roblox and Roku, banked with SVB.
Over the past few years, during and after the Covid pandemic, there was a huge amount of money raised to invest in technology start-ups, and billions of dollars of this cash ended up at SVB, which led to stellar growth for the bank.
SVB was actually quite prudent and financially conservative with all this cash that was landing in its accounts — it bought US Treasuries and Government Mortgage backed securities (MBS), viewed as being safe bets in the market.
The trouble began last March, when the Federal Reserve began to increase interest rates, rapidly bringing the era of cheap money to a grinding halt.
That meant that yield on the US Treasuries — essentially loans to the government — started to increase, leading to a fall in their value.
At the same time, many technology companies started to find it more difficult to raise cash because interest rates were rising. So, they began to use the cash they had deposited with SVB.
As such, SVB had to sell the Treasuries and MBS to cover those withdrawals. But because of rising rates, the Treasuries were by then worth a lot less, which meant a funding gap.
Some depositors then started to get worried about this potential problem at Silicon Valley Bank, and fearing the bank might be headed for trouble, pulled all their money out.
And so started the run on SVB, which happened, as bank runs often do, at frightening speed.
SVB tried to stem the tide and shore-up its balance sheet with a big sale of shares, but that didn't help and the stock crashed.
Within days, the game was over — the Federal Deposit Insurance Corporation (FDIC), which insures depositors in American banks up to $250,000, stepped in and took over SVB.
There are salient lessons in all this, say analysts. Aside from drawing limited parallels to the 2008 financial crisis, some point out that the fate of SVB is intrinsically linked to the demise of the era of cheap money.
“Firms whose business models relied on an artificially low cost of capital are going to struggle, if not outright fail,” said Russ Mould, director of investment at stockbrokers AJ Bell.
“Those who survive may need to cut costs. The US move to protect SVB’s depositors, and thus fledgling tech firms’ cash, will prevent immediate closures, but there are still likely to be casualties further down the road.”
Predicting what is down that road is the challenge. The SVB case illustrates how exiting the era of low and zero interest rates during a period of rapidly rising inflation is making the balancing act of the US Federal Reserve that much more difficult.
“If nothing else, this is a reminder that the Fed may not find it easy to extricate itself from more than a decade of record-low interest rates and $7 trillion of Quantitative Easing [around a quarter of US GDP] without something breaking somewhere,” said Mr Mould.
“Money was cheap and tossed around with abandon as a result of the zero cost associated with it.”
“Now markets are going through a journey once more to discover what is the cost of money, some of that prior reckless abandon could lead to trouble.”