Things certainly move fast in the world of banking. The Federal Reserve made this announcement earlier this morning;
Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system.
This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.
After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors.
Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
This is not a bank bailout, it’s a depositor bail-out though some who the bank has debts to will not be paid. Shareholders will kiss goodbye to any equity. They will include most of us, as most of us invest through funds with these organizations.
This is a big-deal for depositors. 90% of depositors in the American arm of SVB are uninsured (where their deposits are more than $250,000). While this is a significant bail out but the Fed says it won’t be paid for by the US tax-payer. Instead it will be met from a fund set up by the Fed.
Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by US law and the strain on banks will be eased by the Fed which will make funds available if needs be. In short, the banking system will take care of this.
Commentators immediately saw the moral hazard
Massive moral hazard. It amounts to a bailout of all the banks that have underwater HTM securities portfolios. https://t.co/DDCOrU3c0x
— Frances ‘Cassandra’ Coppola (@Frances_Coppola) March 13, 2023
In the interests of balance, Robert Armstrong makes a case against the risk outline above in his morning column and in the FT
Why the rush?
It looks like there are two big risks that outweigh the moral hazard.
- Contagion within the banking system with a rush to the door from depositors of banks perceived to be in the same boat as SVB
- Opportunism from predatory venture capitalists , keen to sweep up tech companies so distressed they are technically bankrupt.
Those two risks exist in the UK too. Speaking on the Laura Kuenssberg show yesterday, Jeremy Hunt said he was minded to provide cashflow (to reduce the risk of companies running out of funds and being predated) but had not decided to guaranteed deposits (other than through FSCS).
It looks as if potential buyers were queuing up to buy SVB in the UK. SVB’s UK operation had only been given autonomous status with its own UK banking license and its own balance sheet last year. So it could be bought independently of the US banking operation.
The takeover of the UK bank would get the Bank of England off the hook for guaranteeing lost deposits in the UK and protect the companies that bank with it.
I wrote earlier this morning that by the time you read this blog, the sale may already be announced. This has proved to be the case
Update * HSBC is to buy SVB *
This morning, the Government and the Bank of England facilitated a private sale of Silicon Valley Bank UK to HSBC
Deposits will be protected, with no taxpayer support
I said yesterday that we would look after our tech sector, and we have worked urgently to deliver that promise
— Jeremy Hunt (@Jeremy_Hunt) March 13, 2023
Customers and businesses who have money deposited in SVB UK will be able to access it as well as other banking services as normal, a statement said.
The Treasury said the deal with HSBC involved no taxpayer money.
HSBC said it had acquired the UK subsidiary of SVB for £1.
Banking and pensions
Apart from owning shares in SVB, which most pension funds will do through global trackers, the peril arising to UK tech start-ups will alarm the trustees of UK schemes.
To see so many of these start ups with the cash from recent equity and debt funding sitting in one bank, will arouse concern about the concentration of risk from start-ups “herding”.
Having been hit by their own liquidity Treasury related liquidity crisis last year, neither schemes or the funds they invest in are going to feel too confident increasing exposure to private illiquid markets in the short term.
The speed at which this happened and the lack of warning that such a risk was latent, will prompt the risk management teams to tread ever more carefully. Last week saw the launch of the first Long Term Asset Fund by Schroders, two years since the vehicle was made available. Things do not move quickly in pensions
The bullish demands of insurers and the Mayor of London for solvency rules to be relaxed and even for a mandatory allocation to productive finance come at an unfortunate time. Reactions from pension trustees on social media suggest they are not ready to move at any pace and SVB will not speed them up.
While it looks unlikely that there will be contagion in the banking sector (we can assume that HSBC will fully honor claims made by the Chancellor), public concern about the lack of awareness of SVB , its activities, clients and its links to venture capital will increase.
This will make it harder for UK pension schemes, especially schemes where the members carry all the risks of investments going wrong, to move away from publicly listed investments. Quite rightly, they will not be herded.
And, as ever, sunlight is the best disinfectant. The long term good that can come out of the short-term crisis, is that we think a little more about how investments work. We either start getting comfortable with the new paradigm, or revert to publicly listed markets, which may be rather boring, but are rather more palatable to the wider investment base.
The UK’s investor base is “us” ; almost all of us are now in the market for some or all of our retirement funding. How Government, banks and private companies come out of this, will determine how confident we will be in our pension funds investing in illiquid markets.