Silicon Valley Bank resolution looks like a win for UK authorities

The rapid rescue of the UK operations of a US bank relied on by the technology sector will have British regulators and politicians patting themselves on the back.

The Bank of England today confirmed it had placed the UK arm of Silicon Valley Bank into resolution: successfully saving thousands of depositors — mostly UK start-up tech firms — from the largest bank failure since the 2008 financial crisis. The sale of SVB to HSBC for the symbolic price of one pound ($1.20) was done under the BOE’s resolution powers to stabilize banks.

It is really the first major time the BOE has used its resolution powers, which were brought in following the crash to ensure taxpayers never again foot the bill for a bank failure. Resolution powers have been lauded as the answer to ending “too-big-to-fail” banks, but 15 years on from the crisis, they remain relatively unused.

In an ideal world, no bank would fail, but the purpose of post-crisis recovery and resolution regimes is to allow lenders to fail in an orderly manner rather than unnecessarily prop them up over fears that their downfall could hit the wider economy.

The litmus test for entry into the regime is whether a bank is failing or likely to fail and that there is a public interest reason for doing so. That generally means larger banks enter resolution, while smaller ones are wound up under normal insolvency processes.

The BOE confirmed on Friday that SVB UK had a limited presence in the UK, with a total balance sheet size of approximately 8.8 billion pounds and a deposit base of approximately 6.7 billion pounds. There were, however, concerns that its unmanaged failure could have caused significant disruption among the UK’s technology startups, which led to urgent talks among authorities over the weekend to find a solution.

Tech sector

SVB was seen as the key lender for around 3,000 UK startups and tech companies, which understood their particular needs. Deposits at the bank had been dropping over the past year, however, as tech companies slumped after the pandemic-era boom and had fewer cash injections from investors.

The bank, which had a comparatively large proportion of its assets tied up in fixed-rate securities, also fared badly as interest rates rose. It went through a liquidity crisis after it announced a sale of stock at a loss of $1.8 billion. The announcement came just days after crypto-focused bank Silvergate failed, spooking investors and deposit holders and leading to a bank run on deposits and its Nasdaq-listed shares to crash.

While the full extent of the impact in the UK is still emerging, the bailout has likely averted widespread insolvencies and redundancies and came as the tech sector heaped as much pressure as it could on the government.

Initially, the Bank of England downplayed the risk, saying the UK arm has “a limited presence in the UK and no critical functions supporting the financial system.” But by this morning, the finance minister, Jeremy Hunt, said he had “worked urgently” with financial regulators over the weekend to avoid “an extremely dangerous” situation.

According to reports, more than 100 CEOs of tech companies warned in a letter to Hunt over the weekend of an “existential threat” to their sector if regulators and the government failed to manage the bank’s collapse.

"The recent news about SVB going into insolvency represents an existential threat to the UK tech sector … Most businesses are operating on very fine margins in the current economy and the contagion from the initial insolvencies will be vast and impact the economy far beyond the tech sector," they wrote.

The letter also criticized the BOE's comment that SVB only had a limited presence in the UK, displaying a lack of understanding of their sector and its role in the broader economy.

Had SVB UK collapsed in an unmanaged fashion, the government would have had several crises on its hands, including company failures, laid-off staff and diminishing confidence in the UK’s booming start-up sector. That’s unappealing to any government, but the ruling Conservative Party remains fragile after a series of leadership troubles and is in the midst of finalizing a fiscal announcement to be delivered on Wednesday in an ongoing cost-of-living crisis.

Had the bank gone into insolvency, depositors would only have been protected to a limit of 85,000 pounds under the UK's financial services compensation scheme, or FSCS. SVB UK had deposits of 6.7 billion pounds, and approximately 3,300 accounts, making the average account worth more than 2 million pounds — so for many clients, the FSCS would barely have scratched the surface.

Resolution success story

The BOE initially sought to place SVB UK into insolvency on Friday, but after the emergence of a private sector purchaser — HSBC — it opted to use its resolution powers. Here the BOE has a menu of five options, including transferring to a bank or a temporary vehicle, bail-in, or temporary public ownership. The private sector purchaser option results in a transfer of part or all of a bank’s business to the buyer, without the need for consent of the failed bank or its shareholders.

The successful resolution, which has meant banking services can resume as normal, will help to vindicate the BOE’s assessment last year that all major UK banks could fail safely. That resolvability test looked at the biggest eight UK banks, but today’s announcement shows that smaller lenders can also pose disruption risks, which the UK’s central bank can easily handle.

There are two previous examples of completed resolutions by the BOE: Scottish Dunfermline Building Society, which was done under the UK Banking Act’s Special Resolution Regime in 2009, and Southsea Mortgage and Investment Company Limited. Both were relatively small banks.

Time will tell how the first stiff test of UK bank resolution fares. In the EU, the relevant resolution authority — the Single Resolution Board — undertook its first exercise in 2017. In that scenario, failing Banco Popular was sold to Santander Bank for one euro, but as bondholders faced losses of around two billion euros, the SRB has since been subject to a barrage of legal cases.

Shares in UK and EU banks continued to fall this morning, even after the HSBC deal was agreed upon, indicating that the market was still on tenterhooks. A cross-party group of lawmakers used the successful rescue to call for a halt on plans to deregulate the banking sector.

"What this incident shows is that now is not the time for wholesale deregulation," the All Party Parliamentary Group on Fair Business Banking tweeted. "The rules put in place following the last banking crisis are there for a reason."

While Parliament will no doubt take stock of the recent events as it mulls proposed reforms contained in the Financial Services and Markets Bill currently before it, for now UK authorities will be pleased and relieved that their actions headed off a potentially disastrous outcome.