Small banks can be big problems, says RUTH SUNDERLAND: This was one of the lessons of the 2008 credit crisis
- When Bank tells us SVB is ‘not critical’, the words should be taken with skepticism
- What the BoE is saying is true, but that doesn’t mean there isn’t a serious problem: there is
- Unlikely to be a catalyst for 2008 recovery, however, dangerous to be optimistic
Small banks can cause big problems. It was one of the lessons of the 2008 credit crunch, when a run on Northern Rock, a mortgage lender based in the northeast of England, was the catalyst for the near-implosion of the financial system. British.
So when the Bank of England tells us that Silicon Valley Bank (SVB) has a “limited presence” in the UK and is “not critical” to the financial system, those words should be taken with a high degree of skepticism.
What the Bank says is true, but that doesn’t mean there isn’t a serious problem: there is. At first glance, it seems unlikely to be the catalyst for a 2008 recovery, although it is always dangerous to be too optimistic.
There are two immediate problems. First, the impact on the UK tech sector; and second, the possibility of contagion or other unexploded bombs in the financial system.
The threat to technology companies that were SVB customers in the UK is indeed taken very seriously. Bank of England Governor Andrew Bailey, Rishi Sunak and Jeremy Hunt were locked in talks over the weekend over a bailout for tech companies caught up in the disaster, some of which are technically insolvent.
Lesson learned? : A race on Northern Rock was the catalyst for the near-implosion of the British financial system
Clearly, the last thing the Prime Minister and Chancellor want is a wave of tech meltdowns. It would undermine hopes of an innovative sector that could lift Britain out of the economic quagmire just as Hunt presents his budget. Temporary help, possibly through the government’s British Business Bank, makes sense. But it doesn’t have to be a blank check.
Tech entrepreneurs tend to be quite young, very vocal and well-connected in the media and in Westminster.
This contrasts with, say, steelmakers, who are also desperate for government help and who are also crucial to the economy, but are in an old-fashioned business operating in less prestigious parts of the country.
A solution must be found for the tech companies left behind by SVB that does not involve unlimited taxpayer subsidies when we are told there must be corporate tax hikes for other companies .
Regarding the impact on the financial sector, SVB has a distinct business model. It had a very high exposure to government bonds on its balance sheet, which meant it was heavily exposed when interest rates rose. The tech companies on his books have also taken a hit — they’re thriving in a low-rate environment that makes borrowing cheap and investors more willing to back high-risk companies.
Traditional banks have more diverse customers. Although they also hold large bond holdings, these are hedged and have a higher proportion of other assets.
But it would be foolish to be complacent.
Banks are better capitalized and generally better managed than during the financial crisis. Still, there are plenty of snafus: Credit Suisse’s multiple disasters don’t inspire confidence, nor does former Barclays boss Jes Staley’s involvement with Jeffrey Epstein.
Although SVB has been making headlines, another US institution, Silvergate, went into liquidation last week after a run on its customers’ cryptocurrency deposits.
In the UK, small fintech enabled Bank North was downsized last year.
Since the crisis 15 years ago, regulators have focused on the big banks, on the reasonable basis that they pose the greatest threat to the system. But, going back to the beginning, small lenders can create big impacts.
