Phew, that was close. That was the overwhelming reaction in the City of London as news sunk in that HSBC had bought the UK end of the collapsed Silicon Valley Bank or SVB for £1, guaranteeing the safety of its customers’ deposits.
It was more of a reflex than a carefully thought-out response, however. Yes, the immediate pressure in the UK, to prevent SVB’s local users, the bulk of them tech start-ups, from going under was relieved.
The fact that the HSBC rescue — bizarrely as ever, code-named Project Yeti in the Treasury — had been achieved without the use of taxpayers’ money was also a cause for congratulation.
That, though, was as far as it went. And, instead of being over, the SVB crisis is continuing to deepen. Grim looks outnumber smiles in the City at present.
First, there are murmurings about the deal hatched between HSBC and Treasury, Bank of England and Downing Street. Others, notably the well-resourced challenger bank, Bank of London, which were also willing to step in, got nowhere.
Overlooked, is the suspicion, while the well-oiled power axis joining Britain’s biggest bank with government and chief regulator whirred away.
The result is that HSBC has walked off with a bargain, a steal was the word being used in the City, having effectively cornered Britain’s tech sector just at a time the giant bank has been making a determined marketing push to secure more work in that area. High fives at HSBC.
Opting for HSBC was quick and convenient but does not send the most welcoming of signals to those hoping to break into the market, to take on established big businesses run by people on first name terms with ministers and senior officials.
Of wider concern and another reason that City faces remain anxious is the fallout in the US. Once again, we’re treated to the mental picture of a butterfly shaking its wings and chaos unfolding.
A mockery of risk exercises
SVB was a small player by industry standards, ranked only 16 in the US. Yet the regulators took the view that the entire banking system was in danger — and not only that, because by extension, if US banking is under threat then the whole, global underpinning is as well, such is the might of the US.
As a result, SVB’s depositors, even those outside the insured $250,000 threshold, are fully safe. But the move by the US Federal Reserve and others can only lead to stricter rules being applied to all smaller banks. Once again, we’re back in the arena of the regulators moving in after the emergency, not before.
It makes a mockery of those risk exercises we hear about being conducted by governments; it’s only when something blows do we really notice there are holes in the system.
So, US banks are now bracing themselves for tighter regulation — Joe Biden is warning as much — and as what happens in the US ripples across the globe, banks elsewhere can expect the same, hence the sinking realisation in London that this isn’t over, not by some distance.
The Fed’s move though, has also reopened the debate about moral hazard. When, if ever, is a bank going to be treated the same as any other business and be allowed to go bust without any government intervention?
This carries echoes of 2008, when we were told repeatedly that banks could not be allowed to fail for fear of ending the world as we knew it, and that those running them could not be jailed, they were “too big to jail”, for the same reason.
Lehman went, although Barclays stepped in to buy much of its US operations. After that, though, authorities everywhere rushed to launch lifeboats at public expense, regardless that in many cases those they were rescuing had brought it upon themselves with aggressive lending, loose controls and crazy risk-taking. And, critically, those regulating them had stood by and watched.
Here we go again. SVB was collecting deposits galore and at the same time buying long-dated US bonds. Once interest rates rose, the value of that debt fell.
The risk, that was there for a regulator to see, was that if deposits dropped, the bank would have to sell the bonds at a loss to raise cash. The question now is, how many other banks are in the same position?
Furrowed brows across the City
Covering all SVB deposits beyond the $250,000 limit marks a fundamental change in policy. Unless the US government is prepared to fork out gargantuan bills in the years ahead that must be accompanied by the application and observation of stricter rules.
Cue an awful lot of reverse engineering as smaller, regional lenders are required to change their ways — hence the reason for their shares falling as much as 50 per cent.
Coming on the back of a global pandemic — only now is China reopening its borders — a war in Europe and rising cost-of-living, a banking crisis is all we need. Worse is the thought that a wholesale rethink of economic policy might be required.
Until SVB’s woes became apparent, the solution favoured by central banks to dealing with inflation has been to raise interest rates. It’s precisely those higher rates that took SVB to the abyss.
Now they’re faced with a dilemma: try to continue the fight against inflation by further raising rates or call a halt. That might help banks caught in the same trap as SVB, and we do not know how many there are, but will do little to keep inflation in check.
That’s what the world is facing. Pre-SVB there was a degree of certainty in the collective direction of travel; now, nobody is sure, everything is in play.
For those that make their living predicting what will happen next, that’s not a comfortable situation to be in. Hence, despite the swooping bailout of SVB in the UK by HSBC, plenty of furrowed brows across the City of London.
Chris Blackhurst is the author of Too Big To Jail: Inside HSBC, the Mexican drug cartels and the greatest banking scandal of the century (Macmillan)