Silicon Valley Bank - 2008 Mk2?

[brad465]

Earlier this week while the UK news was dominated by asylum policy and its fallout, a very prominent US bank that supported tech firms, Silicon Valley Bank, collapsed (the second largest ever by asset value to collapse), and now the UK Government have got involved to support its former customers in the UK. This of course brings comparisons to the GFC in 2008 with its many bank collapses and bailouts, and with interest rates on the rise after years of companies being addicted to cheap borrowing, could this be the start of a new crisis?

UK scrambles to help tech firms after Silicon Valley Bank collapse

Chancellor Jeremy Hunt says government and Bank of England are working to find a solution.

www.bbc.co.uk

The government is working on a plan so that UK tech firms caught up in the collapse of Silicon Valley Bank won't run out of cash, it has said.
The Treasury said it wanted to "minimise damage to some of our most promising companies in the UK" after the US bank's failure last Friday.
US regulators shut down the bank on Friday in what is the largest failure of a US bank since 2008.
The bank's UK subsidiary will be put into insolvency from Sunday evening.
Prime Minister Rishi Sunak, Chancellor Jeremy Hunt and Bank of England Governor Andrew Bailey "were up late last night" and have been "working through the weekend to come up with a solution" to the collapse of Silicon Valley Bank UK, Mr Hunt said on Sunday.
While there's no risk to the UK's financial system as a whole, "there is a serious risk to some of our most promising companies in technology and life sciences", Mr Hunt told the BBC.
"These are very important companies to the UK, a very important part of our future."
"We want to find a way that minimises or avoids all losses to those incredibly promising [firms]," Mr Hunt said.
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".
That plan will mean companies can pay their staff, he said. "That's the big ask we've had in the last 24 hours."
More than 250 bosses of UK tech firms signed a letter addressed to Mr Hunt on Saturday calling for government intervention.
One source in a tech firm told the BBC: "It all feels like it could be pretty terminal for UK tech."
"This Monday, at least 200 firms employing 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% or UK start-ups could be affected by the collapse, the source added.
SVB collapsed in the US after failing to raise to raise $2.25bn (£1.9bn) to plug a loss from the sale of assets, mainly US government bonds, that were affected by higher interest rates.
Its troubles prompted a run on the bank in the US and sparked investor fears about the general state of the banking sector.

Silicon Valley Bank specialised in lending to early-stage businesses, and the company banked nearly half of US venture-backed technology and healthcare companies that listed on stock markets last year.
The firm, which started as a California bank in 1983, expanded rapidly over the last decade. It employs more than 8,500 people globally, with most of its operations in the US.
But it has been under pressure as higher rates make it harder for start-ups to raise money through private fundraising or share sales. More clients were withdrawing deposits in a trend that snowballed last week.
Silicon Valley Bank UK has stopped making payments or accepting deposits prior to going into insolvency from Sunday.
The move will allow individual depositors to be paid up to £85,000 from the UK's deposit insurance scheme.
"SVBUK has a limited presence in the UK and no critical functions supporting the financial system," the Bank of England said after the US collapse.

 

[duncanp]

I don't think there will be any banking collapse or financial crisis on the scale of what happened in 2008.

However, the era of cheap money that followed that crisis is coming to an end, partly due to the pandemic and the war in Ukraine, and those companies and individuals who are highly leveraged will feel the pain most.

We see this in the collapse of the buy to let renting sector, but those companies that will suffer the most are those that have borrowed heavily to expand, and are now laden with debt that is going to cost more to service at the same time as the cost of living crisis means that people have less to spend.

I don't think there is any threat to the UK banking sector as a whole, partly because of the "stress tests" that were put in place after 2008, whereby banks have to show to the Bank of England that would be able to cope in certain hypothetical scenarios.

There is likely to be a steep fall in house prices, which some people would see as a positive thing, although as always there are winners and losers.

 

[Cloud Strife]

However, the era of cheap money that followed that crisis is coming to an end

Not entirely a bad thing. I know quite a few people who got burnt after taking on exceptionally cheap loans to build large houses (250-300m2), only for them to now discover that the double whammy of high interest rates (although historically, normal) and high energy bills is making their lives hell.

We see this in the collapse of the buy to let renting sector

Good.

 

[MotCO]

Some Cryptocurrencies had reserves with Silicon Valley Bank. The loss of the bank put stress on these cryptocurrencies specifically, and there could be a fall out on other cryptocurrencies. I think that this could have a bigger impact than the loss of a single bank in USA, albeit one with a standalone subsidiary in the UK.

 

[duncanp]

Not entirely a bad thing. I know quite a few people who got burnt after taking on exceptionally cheap loans to build large houses (250-300m2), only for them to now discover that the double whammy of high interest rates (although historically, normal) and high energy bills is making their lives hell.



Good.

I agree that the collapse of the buy to let sector is a good thing overall.

The buy to let sector came into existence as a result of the ultra low interest rates after 2008/2009, which meant that those who were in a position to do so could borrow large amounts of money very cheaply, buy a property and rent it out for a profit, with the result that the tenants were paying the landlords mortgage, and contributing toward his capital gains on the property value.

Some people got very greedy and built up "portfolios" of 20+ properties, but this was only profitable given various tax breaks which have now been taken away, and assuming that interest rates would stay very low for the lifetime of the mortgage. These people are the ones who are now getting their fingers burnt.

Hopefully rents and house prices will come down and the end result will be more long term stability in the housing market.

The era of cheap money could never have lasted forever, and it is a good thing in the long term that it is coming to an end.

However, as with someone who is addicted to certain medications, the process of weaning people of their addiction to cheap money has to done slowly to avoid causing too much damage.

 

[Broucek]

I hope the changes to the rental sector make things better for tenants. The issue is that this will get rid of both good and bad landlords. Does anyone have a sense as to whether the new breed of corporate landlords are an upgrade?

 

[najaB]

This of course brings comparisons to the GFC in 2008 with its many bank collapses and bailouts, and with interest rates on the rise after years of companies being addicted to cheap borrowing, could this be the start of a new crisis?

It is possible, but not very likely. The banks have been (somewhat) regulated since the 2008/9 crisis and, for the most part, their asset to liability ratios are a lot healthier now than they were then.

That's not to say that there won't be other banks running into difficulties.

 

[Bletchleyite]

I hope the changes to the rental sector make things better for tenants. The issue is that this will get rid of both good and bad landlords. Does anyone have a sense as to whether the new breed of corporate landlords are an upgrade?

I think they will probably charge more but equally the service will be more consistent, a bit more like renting social housing is now. Very similar to any big vs small business situation.

 

[DarloRich]

I don't think there will be any banking collapse or financial crisis on the scale of what happened in 2008.

However, the era of cheap money that followed that crisis is coming to an end, partly due to the pandemic and the war in Ukraine, and those companies and individuals who are highly leveraged will feel the pain most.

We see this in the collapse of the buy to let renting sector, but those companies that will suffer the most are those that have borrowed heavily to expand, and are now laden with debt that is going to cost more to service at the same time as the cost of living crisis means that people have less to spend.

I don't think there is any threat to the UK banking sector as a whole, partly because of the "stress tests" that were put in place after 2008, whereby banks have to show to the Bank of England that would be able to cope in certain hypothetical scenarios.

There is likely to be a steep fall in house prices, which some people would see as a positive thing, although as always there are winners and losers.

Interesting - could you show some working for that? I cant, on the face of it, make the connection between the failure of one bank (which seems to be very much focused on tech start ups and venture capital) to the wider UK housing market. Are they in a similar position of indebtness to, say, Northern Rock?

 

[yorkie]

Interesting - could you show some working for that? I cant, on the face of it, make the connection between the failure of one bank (which seems to be very much focused on tech start ups and venture capital) to the wider UK housing market. Are they in a similar position of indebtness to, say, Northern Rock?

@duncanp is talking about the effects of higher interest rates (which is the immediate cause of the bank collapse, notwithstanding any other possible contributory factors)

 

[DarloRich]

@duncanp is talking about the effects of higher interest rates (which is the immediate cause of the bank collapse, notwithstanding any other possible contributory factors)

thanks - so not a direct effect of the SVB failure but a potential knock on effect. I am still not sure I see that as consequence as yet but a situation to keep an eye on.

 

[Mcr Warrior]

...could this be the start of a new crisis?

Hopefully not and so no "contagion". BBC Radio 5 Live news just been reporting that HSBC have acquired the UK arm of Silicon Valley Bank to prevent them from going bust.

HSBC swoops in to rescue UK arm of Silicon Valley Bank

The Bank of England and government worked all night to secure a deal involving no taxpayer money.

www.bbc.com

Extract of BBC web story...

A deal has been agreed for HSBC to buy the UK arm of the failed US Silicon Valley Bank (SVB), the government has announced.

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.

 

[Wynd]

It bears repeating that SVB collapsed due to a mismanagement of interest rate risk, effectively they didn't hedge against rising rates, coupled with a very classic Run.

No Bank, not one commercial bank in exitance, would be safe if retail and commercial customers pull deposits, such is the fragile nature of our modern Fractional Reserve banking system.

 

[Tetchytyke]

Does anyone have a sense as to whether the new breed of corporate landlords are an upgrade?

Unlike buy to let “investors” mortgaged up to the hilt, bigger corporate landlords would have the capital and reserves required to effect prompt repairs. But so would buy-to-let “investors” who aren’t mortgaged to the hilt. We own a mortgage-free rental property in the UK and, because it’s mortgage free, we have the headroom to fix things quickly.

The biggest reason behind the buy-to-let changes is that mortgage interest is no longer deductible from profits. And rightly so.

No Bank, not one commercial bank in exitance, would be safe if retail and commercial customers pull deposits, such is the fragile nature of our modern Fractional Reserve banking system.

Absolutely. Bank Runs are as old as banks themselves, but with fractional reserves no bank has enough money to give everyone their cash back. It’s more of a risk for institutional depositors who don’t get FSCS protection, but people should remember this and spread their risk accordingly. I have current accounts with several different banks, so if one has a run I’d still hopefully have access to funds from another.

 

[Mcr Warrior]

No Bank, not one commercial bank in existance, would be safe if retail and commercial customers pull deposits, such is the fragile nature of our modern Fractional Reserve banking system.

SVB UK is not the first time, and almost certainly won't be the last time, that a specialist bank has had a run against it, and has then either needed rescuing, or, instead, has gone bust.

(On another separate thread, we've recently been discussing the probable impact of Overend, Gurney & Company collapsing back in 1866 (!))

 

[GRALISTAIR]

However, as with someone who is addicted to certain medications, the process of weaning people of their addiction to cheap money has to done slowly to avoid causing too much damage.

And it can be argued (and has been by certain (people), that the Fed put interest rates up far too quickly. Some inflation is surely the lesser of the two evils of that and a worldwide banking collapse.

 

[najaB]

And it can be argued (and has been by certain (people), that the Fed put interest rates up far too quickly. Some inflation is surely the lesser of the two evils of that and a worldwide banking collapse.

Some inflation, yes. But double-digit and showing no sign of slowing down would be just as damaging as banking turmoil.

 

[dk1]

Annoying few days on the markets seeing the de-value of my stocks but I suppose a stable market is a not healthy market as they say. Adds to the thrill of it all.

 

[brad465]

Stock Markets are still not comfortable in relation to the SVB fallout, although they are still quite high relative to recent years (although monetary policy has super inflated them since 2020):

Credit Suisse to borrow up to $54bn from Swiss central bank

A slump in the troubled lender's shares has intensified fears about a broader bank crisis.

www.bbc.co.uk

Banking shares have fallen sharply again as investors remain nervous following the collapse of Silicon Valley Bank (SVB) in the US last week.
The failure of SVB has raised fears that other banks could also be facing problems.
Shares in Swiss banking giant Credit Suisse hit a new low after they plunged by 20%.
The fall came after Credit Suisse's largest investor said it could not give the bank any more financial help.
Share indexes across Europe - including the UK's FTSE 100 - were down by about 2.5% by mid-morning.
The FTSE 100 has fallen 6% in the past week to reach a three-month low.
"Investors remain nervous about what might be lurking in the shadows," said Russ Mould, investment director at AJ Bell.
"It's no wonder that investor sentiment remains cautious towards the big banks given that credit agency Moody's downgraded its outlook on the US banking system to 'negative'."

Credit Suisse's shares slumped after it revealed on Tuesday that its auditor, PwC, had identified "material weaknesses" in its financial reporting controls.
That prompted major investor the Saudi National Bank to say it would reject calls to inject further funds into the Swiss lender.
The wider problems in the banking sector began last week with the collapse of SVB, the US's 16th-largest bank.
The bank - which specialised in lending to technology companies - was shut down by US regulators on Friday in what was the largest failure of a US bank since 2008.
SVB's UK arm was snapped up for £1 by HSBC.
In the wake of the SVB collapse, New York-based Signature Bank also went bust, with the US regulators guaranteeing all deposits at both.
But fears have persisted over the fallout from the collapse and trading in bank shares has been volatile this week.
On Monday, trading was temporarily halted in several smaller US banks as shares slumped, although Tuesday saw stock prices rebound.
However, credit ratings giant Moody's has warned of more pain ahead for the US banking system.
On Tuesday, it cut its outlook for the sector to "negative" from stable, warning of "a rapid deterioration in the operating environment".
One of the problems that hit SVB was that it was forced to sell US government bonds that it held in order to raise money.
But the value of these bond holdings had fallen over the past year as the US Federal Reserve increased borrowing costs to try to curb inflation.
Many other central banks - including the Bank of England - have also been raising interest rates. As rates rise, the value of bond portfolios has declined.
The falls mean many banks could be sitting on significant potential losses - though the change in value would not typically be a problem unless other pressures force the firms to sell the holdings.
"The worry is that banks sitting on large unrealised losses in their bond portfolios might not have sufficient buffers if there is a fast withdrawal of deposits," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
"Although the biggest players are judged not to be at risk, thanks to the chunky layer of capital they are sitting on and the stable nature of their deposits, the nervousness is palpable."

 

[MikeWM]

There have been rumours flying around about Credit Suisse being on the brink of collapse for 6 months or more. And banks do collapse if people lose confidence in them - as with much nowadays, it isn't entirely a rational process.

But I don't see any particular reason to expect a rerun of 2008 here *unless people panic*. Unfortunately we've seen quite a tendancy to panic from the general population over the past few years at the first hint of an issue, from toilet rolls, to fuel, to energy, to tomatoes. The general unease of the population right now isn't good for the stability of anything, banks in particular. So pretty much anything could end up happening here, from nothing at all to something really serious.

 

[Bluejays]

Seems like HSBC have got themselves a very good deal. They've got the pockets to cover any short term liabilities arising from SVB, and have picked themselves up a big customer base for £1.

 

[nlogax]

Not sure where this Credit Suisse situation is going but we should keep a close eye on it. When their largest investor is unwilling or unable (for regulatory reasons) to pump any more cash in then the situation begins to look dicier by the day.

 

[brad465]

There have been rumours flying around about Credit Suisse being on the brink of collapse for 6 months or more. And banks do collapse if people lose confidence in them - as with much nowadays, it isn't entirely a rational process.

Not sure where this Credit Suisse situation is going but we should keep a close eye on it. When their largest investor is unwilling or unable (for regulatory reasons) to pump any more cash in then the situation begins to look dicier by the day.

I'd be surprised if CS was allowed to fail, as it probably will meet the "too big to fail" definition, so I'd expect someone to bail it out if it would otherwise collapse. However if it's a state bailout expect public resentment at double standards again.

 

[MikeWM]

I'd be surprised if CS was allowed to fail, as it probably will meet the "too big to fail" definition, so I'd expect someone to bail it out if it would otherwise collapse. However if it's a state bailout expect public resentment at double standards again.

You're probably right, but I also agree that there's only so much of this 'socialism for the rich, capitalism for the poor' that people should be expected to take before they get really annoyed.

There shouldn't be *any* 'too big to fail' private institutions, in particular banks, as it offers a clear incentive to indulge in over-risky behaviour. But we don't seem to have learned anything at all from 2008 so at some point it will all happen again, probably even worse.

 

[Broucek]

You're probably right, but I also agree that there's only so much of this 'socialism for the rich, capitalism for the poor' that people should be expected to take before they get really annoyed.

There shouldn't be *any* 'too big to fail' private institutions, in particular banks, as it offers a clear incentive to indulge in over-risky behaviour. But we don't seem to have learned anything at all from 2008 so at some point it will all happen again, probably even worse.

I get what you're saying but a genuine banking crisis has the potential to have a terrible impact on the poor who would be much less able to absorb it even if the proportional impact was higher on the rich.

 

[MikeWM]

I get what you're saying but a genuine banking crisis has the potential to have a terrible impact on the poor who would be much less able to absorb it even if the proportional impact was higher on the rich.

Oh I agree - although if we hit the most severe form of crisis, it may well have just as serious an impact on the rich, at least for a time. Effectively wiping out all assets and all debts and 'starting again'.

My frustration is that we had an opportunity after 2008 to fix this, but instead we just carried on as before in the blithe hope it was a one-off. Sooner or later, it won't be.

 

[brad465]

You're probably right, but I also agree that there's only so much of this 'socialism for the rich, capitalism for the poor' that people should be expected to take before they get really annoyed.

There shouldn't be *any* 'too big to fail' private institutions, in particular banks, as it offers a clear incentive to indulge in over-risky behaviour. But we don't seem to have learned anything at all from 2008 so at some point it will all happen again, probably even worse.

Depends, we learned nothing that should have been learned, however one big lesson learned that should not have been is that a rich spiv can gamble as much as they like, the taxpayer will bail them out if/when it all goes wrong, and certainly won't go to jail (apart from in Iceland). The most severe UK punishment I can recall being issued was one former executive losing their knighthood.

 

[Broucek]

Depends, we learned nothing that should have been learned, however one big lesson learned that should not have been is that a rich spiv can gamble as much as they like, the taxpayer will bail them out if/when it all goes wrong, and certainly won't go to jail (apart from in Iceland). The most severe UK punishment I can recall being issued was one former executive losing their knighthood.

Kind of.... Bank shareholders took quite a hit in 2008. There were lower consequences for senior employees (although many of those had shares or share-based deferred bonuses) but punishing individuals is not easy to do...

 

[Mcr Warrior]

Depends, we learned nothing that should have been learned, however one big lesson learned that should not have been is that a rich spiv can gamble as much as they like, the taxpayer will bail them out if/when it all goes wrong, and certainly won't go to jail (apart from in Iceland).

Didn't "rogue trader" Nick Leeson serve over four years in Changi prison (Singapore) after trashing Barings Bank in the mid 1990's and doing a runner?

 

[Wynd]

Choice 1. Bail out the banks, (using public/government money) to protect bank shareholders, theoretically, support bank lending/credit (private money) in the economy. Party on.

Choice 2. Dont print additional public/government money. Let the banks fail. Capital base wiped out. Private money supply, credit/debt can then be called by whatever legal entity is left. In theory, this means all mortgaged/credit cards/overdrafts/loans get called, in as little as 30 days. Personal and corporate bankruptcies soar as the money supply decreases overnight by 90%. All music halted and only 1 chair for every 10 dancers.

Its a choice. You could go for option 2 but what would effectively happen is the Bank of England would be nationalising the mortgage/credit/loan/overdraft markets at a stroke and effectively eliminating private money, and thereby commercial banking.

We would all hold accounts with the BOE. Some call this, "sound money" and it has been used, extensively in the past. Gold/Silver money. Gold Standard. Tally sticks. Clay tablets.

The primary snag, understatement, is that it kills, stone dead, credit markets not on a personal level only, but on a commercial level. Bond markets no longer have a secondary component, as there are no primary dealers, they all went under. This means no money markets, although I don't suppose you need it if there are no overnight lending requirements or discount window.

To say it would be a painful re-adjustment would be an understatement, but many argue, cogently, that this is the way things should go.

What doesn't help the broader argument is that every time commercial private banks get in to trouble, they are not allowed to fail and continue to be bailed out, so what difference does it make if we all keep assuming their debt anyway? Why not just cut out the middleman and assume the debt collectively ourselves...

Fractional reserve banking is great when it works well, lots of credit and subsequently innovation, but it does have a nasty habit of relying on public money, but then again, we all do.