Markets were calmed on Monday morning following the news that HSBC UK would be buying the UK arm of Silicon Valley Bank (SVB), preventing it from going into insolvency.
The Bank of England had said on Friday that it was seeking a court order to place the bank into an insolvency procedure just hours after US regulators took over control of its parent company.
SVB’s collapse is the largest failure of a US bank since the 2008 financial crisis and it is the second-largest single bank to collapse in US history.
The Bank of England and the US Treasury Secretary have both tried to reassure investors that its collapse doesn’t represent a wider threat to the banking and technology sectors.
SVB was founded in 1983 and has long been a popular choice for investors and entrepreneurs in the technology sector. It was claimed in 2015 that it served 65 per cent of all US start-ups.
In recent years, the bank had invested much of its capital in US government bonds, including many backed by mortgages, which fell dramatically in value as the Federal Reserve hiked interest rates.
Economic conditions have also hit the bank’s clients, many of which have struggled to maintain pace following a boom during the pandemic, with mass layoffs across the sector.
As companies struggled, many began withdrawing their funds deposited with SVB, leaving the bank with limited capital to draw on to meet its liabilities.
On 8 March, SVB announced it needed to raise $2.25bn in order to balance the books after it was forced to sell many of its government bonds at a $1.8bn loss to increase its capital.
This move panicked investors, who on 9 March alone tried to withdraw $42bn – almost a quarter of the bank’s total deposits.
This caused SVB’s share price to fall by 60 per cent, and trading of its shares was halted on 10 March as US regulators stepped in to take control of the bank and its assets.
A few hours later, the Bank of England stepped in and halted operations at SVB UK, the British subsidiary of the US bank, which prompted warnings that it could enter insolvency.
The Financial Times reported that SVB UK had sought £1.8bn of liquidity from the central bank, which can supply emergency funding to a bank so long as it has adequate collateral, via its discount window facility.
Customers in both the UK and the US had their deposits protected by regulators in their respective countries, meaning they could access their funds on Monday. Shareholders and unsecured creditors, however, are not protected.
There were concerns that the collapse of SVB UK could lead many British start-ups to go bankrupt as they find themselves unable to service payroll and other key costs.
One technology sector expert told the BBC that between 30 per cent and 40 per cent of UK start-ups employing up to 50,000 people could have been affected by the collapse.
Chancellor Jeremy Hunt warned at the weekend that the bank’s failure “could have a significant impact on the liquidity of the tech ecosystem”, while Science and Technology Secretary Michelle Donelan said the Government would do “everything we can” to limit its impact.
“We recognize that the tech sector is often not cashflow positive as they grow and I am determined to stand with them as we do everything we can to minimize impact on the sector,” she wrote on Twitter on Saturday.
If insolvency procedures had begun for SVB UK, eligible depositors would have had £85,000 of their money protected or up to £170,000 for joint accounts.
This could have had serious repercussions for tech firms with millions invested in the bank, likely leading to dozens of start-ups closing their doors.
HSBC’s purchase of SVB UK for just £1 was reached after a series of talks involving the Bank of England, the Prudential Regulation Authority, the Treasury and the Financial Conduct Authority.
The buyout means SVB UK will not have to undergo the insolvency process, and HSBC has assured its new customers that all their previous deposits are protected.
“The Bank and HMT [the Treasury] can confirm that all depositors’ money with SVB UK is safe and secure as a result of this transaction,” the Bank of England said in a statement.
“SVB UK’s business will continue to be operated normally by SVB UK. All services will continue to operate as normal and customers should not notice any changes.”
In a statement, Chancellor Jeremy Hunt said: “The UK’s tech sector is genuinely world-leading and of huge importance to the British economy, supporting hundreds of thousands of jobs.
“I said yesterday that we would look after our tech sector, and we have worked urgently to deliver on that promise and find a solution that will provide SVB UK’s customers with confidence.”
Could other major banks also collapse?
Immediate concerns over SVB’s collapse were calmed by the quick response of regulators in the UK and the US, with the US government acting to guarantee all deposits in the bank.
The Bank of England sought to reassure the sector last week, claiming that SVB UK had a “limited presence” in the economy and “no critical functions supporting the financial system”.
US Treasury Secretary Janet Yellen also tried to calm investors on Friday, claiming there was not a wider threat to the banking and technology sectors.
A US Treasury Department statement said: “Secretary Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event.”
The Federal Reserve has also announced a new scheme allowing banks to borrow funds backed by government securities in order to help them meet demands from customers on their deposits.
This would prevent other banks in the US from running out of capital as SVB did, which ultimately led to its collapse.
However, while SVB and its customers are now largely protected, there are more immediate concerns for the wider technology sector, which has now lost one of its largest backers.