Published: 13 March 2023
Specialist US start-up lender Silicon Valley Bank (SVB) collapsed on Friday and has since been shut down and placed into insolvency by US regulators. It is the largest banking failure since 2008. The crisis is said to have been triggered initially by news that ratings firm Moody’s Investors Service told SVB Financial Group, the parent of SVB, that it was preparing to downgrade the bank’s credit, after the value of bonds where SVB had parked its money fell due to the higher interest rates. Then, on Thursday, shares in the Nasdaq-listed bank plunged some 70% - easily their lowest level since 2016 - when the bank chose to respond by selling $21bn of bonds at a $1.8bn loss, before launching a $1.75bn share sale to shore up its balance sheet and plug the hole caused by that sale. The intention was to reinvest the proceeds of the share sale in assets delivering higher returns. However, the plan backfired spectacularly: the bond sale spooked investors, and the firm’s start-up clients rushed to pull their cash from the firm. The panic saw banking stocks in London plummet amid contagion fears and concern about the general state of the banking sector, with a combined £10bn or so wiped off their value. Barclays closed 3.67% down on Friday, NatWest was down 2.49%, Lloyds Banking Group 3.27% and HSBC 4.59%. The FTSE 350 banking index was down around 4.1% by noon, and the whole FTSE 350 was dragged lower by 1.68%. The FTSE is still plummeting this morning: at the time of writing the FTSE 100 is down 158 points, or 2.04%.
Silicon Valley Bank launched as a California bank in 1983 and following rapid expansion employed 8,500 people globally until yesterday. It specialised in lending to early-stage businesses, serving nearly half of US venture-backed technology and healthcare companies that listed on stock markets last year, hence it’s failure has caused widespread, global fallout.
The bank’s British subsidiary, Silicon Valley Bank UK, has also been put into insolvency. However, SVBUK was ring-fenced with its own balance sheet and governance structure, has no personal retail customers, and is regulated by the Prudential Regulation Authority, as is part of the Financial Services Compensation Scheme, meaning depositors can be paid up to the protected limit of £85,000 or up to £170,000 for joint accounts. However, with its accounts currently frozen, the bank’s British businesses customers are clearly in a precarious position. The Daily Mail says the UK arm of the bank has supported several notable tech groups including review website Trustpilot and software firm Learning Technologies. Yesterday, Chancellor Jeremy Hunt told the BBC that he, Prime Minister Rishi Sunak, and Bank of England Governor Andrew Bailey have been "working through the weekend to come up with a solution" to the collapse, fearing for the future of British tech firms potentially unable to pay staff or continue operations. He said the government was "working at pace" to bring forward a plan to make sure firms can meet their cashflow needs "within the next few days,” although he said he could not commit to companies recovering all of their money. He also told Sky News yesterday that he did not believe there was a "systemic contagion risk," saying: "The Bank of England has made it very clear there is no systemic risk to our financial system, so people should be reassured on that basis. But there is a serious risk to our technology and life sciences sectors. It happens to look after the money of some of our most promising and exciting businesses”.
LATE UPDATE: HSBC has swooped IN to buy SVBUK, meaning customers and businesses who had been unable to withdraw their money will now be able to access it as normal. HSBC says it paid just £1 for SVB's UK arm. Earlier, Treasury sources told City A.M. that this would be the Government’s preferred option to the crisis, although it was also working on a package which would see the British Business Bank step in on an interim basis to provide access to funds for affected firms.
Hunt had also faced pressure to act from more than 200 bosses of UK tech companies who signed a letter addressed to him on Saturday calling for government intervention. The letter, from Fintech Founders, said many financial technology firms did all of their banking with SVB "and will therefore go into receivership imminently unless preventative action is taken". One source in a tech firm had told the BBC: "It all feels like it could be pretty terminal for UK tech." "This Monday, at least 200 firms employing tens of thousands of people will find they can't pay their staff or suppliers because the bank they had an account with has gone bust," the source said. Between 30% and 40% of UK start-ups employing up to 50,000 people could be affected by the collapse, the source added.
The Coalition for a Digital Economy (Coadec), a non-profit campaign group supporting digital start-ups, had also warned that the collapse of SVBUK could have a significant impact on tech start-ups. Executive Director Dom Hallas said in a statement on Saturday: “It is clear this could have a significant impact on the UK’s tech start-up ecosystem…We know that there are a large number of start-ups and investors in the ecosystem who have significant exposure to SVBUK and will be very concerned. We have been engaging with the UK Government, including Treasury and No 10, about the potential impact and I know that work has been going on overnight on policy options”.
In other business news…
Chancellor Jeremy Hunt yesterday committed to raising Corporation Tax in a round of media interviews, despite telling journalists he wants the UK to have "the most competitive business taxes in the world".
Meanwhile, Hunt is being urged by the Capital Markets Industry Taskforce (CMIT) to encourage more of the £4.6tn managed by pension schemes and insurers to be invested in businesses. The taskforce, set up last year in consultation with the Government to deal with this issue, highlights the 'alarming' collapse in the amount of 'risk capital' being invested in UK assets, the BBC reports. The letter notes that, in 2000, 39% of all shares listed on the London Stock Exchange (LSE) were owned by such institutions but, by 2020, this had fallen to 4%, as much of the cash has been shifted into bonds and property. 'The result of this has been both poorer returns for UK pensioners and, importantly, that UK pensions are not being utilised to drive the growth of the UK economy,' it said, highlighting two changes it wants to see enacted: the delayed Solvency II set of reforms, allowing insurance firms to deploy more risk capital, and the need to consolidate thousands of smaller pension schemes. The letter was signed by Peter Harrison, boss of asset manager Schroders, and Andy Briggs, who leads pensions giant Phoenix, on behalf of the taskforce, which is chaired by LSE boss Julia Hoggett. Hoggett told the Daily Mail: 'This debate affects everyone. Every pound put to work in the UK's capital markets drives economic growth, benefiting businesses and savers alike.'
Junior doctors began at a 72-hour strike at 7am this morning. Overall these doctors make up 45% of the medical workforce, the BBC says, and two thirds of them are members of the BMA union which is organising the strike. The junior doctors are planning on walking out of emergency as well as planned care and their action is likely to affect every region in England.
Planned London Underground and national rail strike action will disrupt London travel this week, between Wednesday and Friday. On Wednesday 15th March, little or no tube services are expected to run, and the Elizabeth line, London Overground and bus services will be much busier than normal, possibly with queuing systems in place, Transport for London says. The DLR and London Trams are expected to run as normal but the closure of some tube stations may mean some services will be unable to stop at all stations or run to their normal destination. On Thursday 16th March, tube services will start later than normal following strike action the previous day. The London Overground, Elizabeth line and some parts of the Bakerloo and District lines will also be disrupted by national rail strike action. A good service is expected across the TfL network by late-morning on Friday 17 March.
Vodafone is reportedly putting final touches on a deal with Three UK to create Britain's largest mobile operator, and may announce details of the tie-up as soon as this month. According to Bloomberg, Vodafone and Three UK's owner, CK Hutchison Holdings, are working through the last details of the structure of the deal, and ways to address potential antitrust issues surrounding it. They two parties confirmed in October that they were in talks to merge their UK businesses.
The Serious Fraud Office (SFO) has dropped its case against three former G4S managers, bringing a decade-long investigation to a close. Richard Morris, Mark Preston and James Jardine were formally acquitted at a hearing at the Old Bailey on Friday, after the SFO put forward no evidence. All had denied the charges against them, and an application to halt the prosecution was due to be heard later this month.
“Two of the UK's top bosses have pocketed bumper payouts – despite the country being in the grip of a cost-of-living crisis,” the Daily Mail reports. BP's CEO Bernard Looney and Emma Walmsley, who heads GlaxoSmithKline, scooped a combined £18.5million for 2022. Looney's pay packet more than doubled to £10million last year, consisting of a basic salary of £1.37m, an annual bonus of £2.37m, and shares worth £6m. Walmsley meanwhile, received a remuneration package of £8.5m, more than the £8.2m garnered the year before.
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