Risky Business
Chancellor Jeremy Hunt and the Treasury have had a busy week. Delivering a budget in a continued cost of living crisis is not the ideal time for a bank to collapse – especially one so important to the UK technology sector.
Although not a household name, the UK arm of Silicon Valley Bank held £6.7 billion in capital, and on Friday, the scale of the fall out was realised as senior technology industry figures and hundreds of start-up founders contacted the Government pleading for intervention.
Shifts in sentiment can spark a run on deposits. As we saw in 2008, this could happen to banks of any size, but smaller, less diversified ones often face higher volatility.
In his pre-budget media interviews at the weekend the Chancellor said he was working at pace to protect the UK’s most promising companies. And they did – striking a rescue deal with HSBC.
Could another bank fail? Taking risks in return for profit is at the heart of capitalism, as President Biden said this week. Though the collapse of three small US banks, as well at Silicon Valley Bank, in under a week is obviously unsettling.
On Monday, £60 billion was wiped off the FTSE100 and banking shares across the globe fell dramatically.
So what happened? Silicon Valley Bank’s assets tripled to $198 billion in post pandemic pent up investment. They tried to take a prudent route to manage their reserves by buying a large amount of long-term US government bonds. This strategy worked well - until interest rates rose. The tempestuous timing of the tech recession and VC backing falling through, created the need for clients to withdraw their money causing a cash crisis.
Coinciding with these technology sector woes, the bank lost their chief risk officer in April 2022, her replacement was not in post until January this year. The position should have been filled much sooner.
Governance is paramount in any organisation and in a financial institution the chief risk officer has a vital role. Success can be temporary and strategy should always be provisional. You must stay ahead of internal and external threats and opportunities.
Communication in times of crisis is also crucial. In this case, unclear, untimely and uninformed communication led to panic and confusion. Instead of reassuring clients and employees, the communications added fuel to the fire.
Whatever the actual sum of causes for Silicon Valley Bank’s demise, it looks like HSBC have bagged a bargain with its UK tangible equity expected to be around £1.4 billion. Importantly, right now jobs, livelihoods and UK innovation have been saved.
Surely though, the key point is that governments and regulators cannot and should not either run banks or be relied on to always be there to catch the falling knife when they fail.