The past 72 hours have witnessed scenes reminiscent of the global financial crisis 15 years ago.
In order to prevent the bankruptcy of the UK branch of Silicon Valley Bank (SVB) from wreaking havoc on Britain’s booming high-tech and biotech industries, Jeremy Hunt and the Bank of England had to act at a extraordinary speed.
The purchase of SVB for one pound by HSBC – Britain’s and Europe’s largest bank – is meant to send a signal to the world that the UK banking system is safe.
No taxpayers’ money has been spent and the Chancellor’s campaign to make the UK a hotbed of tech innovation appears untouched. How long this will remain the case, however, is far from clear.
Despite attempts to prevent the SVB collapse from turning into a full-fledged crisis, shocks are being felt in the United States and on the continent, where stock trading of Credit Suisse and several Italian banks has been suspended after heavy falls.
In order to prevent the failure of the UK branch of Silicon Valley Bank (SVB) from wreaking havoc on Britain’s burgeoning high-tech and biotech industries, Jeremy Hunt and the Bank of England had to act at a extraordinary speed (stock image)
In New York, meanwhile, Signature Bank, which handled the cryptocurrency industry, closed shop.
And the historic First Republic Bank, which towers over San Francisco’s financial district, has been offered a $70bn (£58bn) lifeline by the US central bank, the Federal Reserve. And among U.S. regional lenders there was a bloodbath with shares falling 50%.
If these signals are to be believed from the United States – the financial and technological center of the world – we are entering a dangerously stressful period for the world economy, with inflation and economic contraction caused by the Covid-19 and Russia’s invasion of Ukraine. barely behind us.
Indeed, efforts by the Federal Reserve, Bank of England and other central banks to stem the cost of living crisis by rapidly raising interest rates have inadvertently contributed to the current problems in the banking system.
Widespread increases in interest rates have caused government bond prices to fall – which is one of the factors behind the current implosion. Government actions are like a seesaw. When interest rates rise, bond values fall and vice versa.
Silicon Valley Bank has invested cash deposited by its high-tech clients in long-term bonds. When he sought to get rid of it, he suffered huge losses, triggering the current collapse.
It’s no different to the events of last September when Trussonomics led to the massive sell-off of UK government bonds, known as gilts, and put the billions of Britain invested in pension funds at risk. Dominoes have started falling across the United States, prompting authorities to launch an emergency bailout and move quickly to erect a safety net for the country’s financial system.
US regulators have implemented a “Bank Term Funding Program” that allows banks with cash flow problems to exchange depreciated assets such as US bonds, mortgage-backed securities and other collateral for cash. at the US central bank.
This is initially funded by $25bn (£21bn) from the Federal Government’s Exchange Stabilization Fund, a resource that is activated in times of economic crisis.
The purchase of SVB for one pound by HSBC – Britain’s and Europe’s largest bank – aims to send a signal to the world that the UK banking system is safe
It is estimated that the US banking system is currently sitting on potential losses of $300bn (£250bn) in US government bonds, which it intended to hold until maturity.
Events at SVB, Signature and First Republic show that the security of government bonds is illusory if they cannot be easily exchanged for dollars.
The US Treasury and the Federal Reserve hope that by putting in place a safety net, they can prevent a repeat of 2008 when the collapse of investment bank Lehman Brothers triggered a global crisis that led to a deep recession.
On this side of the pond, Jeremy Hunt and Bank of England Governor Andrew Bailey have so far managed to control the UK fallout from SVB without once again putting taxpayers’ money on the line.
The biggest problem for MM. Hunt and Bailey is how to ensure that the current high volatility does not affect the fight against inflation.
In its effort to halve the rising cost of living this year, Hunt has already benefited from falling energy prices. But keeping interest rates high (to suppress inflation) and ending money printing is an essential part of this battle.
Unfortunately, the classic response to the financial and economic crisis is for central banks to do the opposite: lower interest rates and ease credit conditions so that consumer demand and business appetite for investment do not not fall from a precipice.
In the face of what financial markets are calling a “deflationary” shock, it seems inconceivable that the Fed in the United States and the Bank of England will raise interest rates while the banking sector in the United States and Europe in the face of turbulence.
Andrew Bailey and the Bank of England showed their willingness to intervene in the markets and save the pension system last fall. If a fundamental risk to economic and financial stability develops, they will follow the US lead and step in – even if it means putting taxpayers’ money on the line again.
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