Last autumn, Silicon Valley Bank UK claimed that rising interest rates would expose more potential financial problems, while celebrating becoming a fully UK-run subsidiary in a promotional video. Regulators also expressed concerns about the global financial system after a decade and a half of near-zero interest rates and warned of unforeseen consequences in stable parts of the system.
The recent “Liability Driven Investment” pension crisis was just the first of several ticking time bombs in debt markets, which have become accustomed to almost free borrowing.
Silicon Valley Bank’s balance sheet problems were exacerbated by rising interest rates on government-backed borrowing, and its focus on the high tech sector caused a herd-like flight of its US deposits. UK authorities state that the direct fall of SVB’s UK arm poses no systemic risk to UK financial stability, as it is too small to impact it directly.
However, it is economically important to many high-growth potential companies, particularly start-up tech companies and their funders in venture capital and private equity. The government considers there is a serious risk to the tech sector, but some, including former top Treasury boss Nick Macpherson, fear that offering help beyond the normal deposit protection limit could create moral hazard.
Is it possible to treat start-up business customers differently from big investors? The UK government is currently in discussions with other banks to either take on the struggling UK subsidiary of Silicon Valley Bank or offer some form of guarantee to allow clients to pay their employees and suppliers.
Meanwhile, the chancellor is focusing on the UK’s tech future in his upcoming Budget announcement.
Ordinary depositors in other UK banks need not worry, as Silicon Valley Bank is a very niche bank that serves customers in a specific sector.
However, the situation in the US is different. Regulators there are not inclined to bail out sophisticated tech investors who take financial risks in exchange for potentially high returns.
Nevertheless, regulators are keen to provide enough reassurance to avoid a run on deposits that could spread to smaller banks and have a ripple effect on other stock markets and the global economy.
Therefore, this situation is important for UK economic policy and US financial stability. It could also serve as a warning sign of other unknown risks as the financial system adjusts to the end of the era of nearly free money.
