HSBC rescues SVB’s UK arm – What’s happened?

Dafferns Wealth

Silicon Valley Bank, the 16th largest bank in the US, was shut down by the country’s regulators last week, and we’ve now learned that HSBC has moved to buy the UK arm of the collapsed institution.

Since the bank specialises in lending to technology companies, the rescue by HSBC will be a huge relief to tech firms in the UK, who can continue accessing their deposits and banking services as normal.

It should be pointed out that HSBC paid just £1 for the SVB’s UK arm, and that no taxpayer money has been used to rescue it.

Of course, bank bailouts are, for many of us, a very fresh and visceral memory. That’s why both the Chancellor of the Exchequer and the Bank of England have sought to assuage fears that this may have been a “Lehman Brothers moment” – in reference to one of the catalysts behind the 2008 global financial crisis.

Chancellor Jeremy Hunt insisted there was “never a systemic risk to our financial stability in the UK”, while the Bank of England stressed that “no other UK banks are directly materially affected by these actions”.

“The wider UK banking system remains safe, sound and well capitalised,” the Bank stated.

However, the move does still raise several important questions.

For example, at a time when the government has placed great importance on the UK tech industry, how secure are businesses in this sector?

Jeremy Hunt himself described these firms as “fragile”, saying: “Some of them only had bank accounts with SVB UK and so 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.”

The intervention also invites questions about future monetary policy, both in the UK and around the world.

Goldman Sachs, for instance, had previously expected the US Fed to raise interest rates later this month, but following the collapse of SVB, it now believes they will be kept on hold at the current level of 4.5% to 4.75%.

Higher interest rates in the US had pushed up the yield on government bonds, thus lowering their price. SVB then racked up losses of $1.8bn when it sold assets including US government bonds and subsequently launched a share sale to boost its finances. At the same time, SVB was under pressure to return money to depositors, and many clients started withdrawing their money.

At a time when central banks around the world are tightening monetary policy to curb inflation, could policymakers start backing off from increasing interest rates, for fear of putting pressure on the financial system?

The collapse of SVB shows that a climate of rising interest rates has had a tangible effect on the value of banks – and since we cannot know how long this will last – questions about the security of banks in this environment will inevitably be raised.