Silicon Valley Bank: HSBC rescues SVB UK but market turmoil continues – business live

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Happily, Silicon Valley Bank UK customer Diaceutics has now asked for its shares to be unsuspended.

Diaceutics, a testing laboratories company, requested the suspension at 7am after being unable to access any of its funds held by SVB (as covered here).

But that was before it had learned that HSBC had bought its bank.

Now, Diaceutics says it “has comfort” that it will regain access to its ?19.8m of cash and cash equivalents currently held on deposit with SVBUK.

It adds:

This access removes all uncertainty over the Company’s ability to service its working capital requirements and as a result the Company has therefore requested that the temporary suspension of the Company’s ordinary shares on AIM is now lifted.

A quick catch-up of the key points so far today.

The UK arm of collapsed US lender Silicon Valley Bank has been bought by HSBC after a weekend of negotations involving the Government and Bank of England.

HSBC is paying a symbolic ?1 for SVB UK, after the tech-focused bank’s US parent company collapsed last week.

Announcing the deal, Noel Quinn, HSBC Group CEO said his bank would help SVB UK customers “grow in the UK and around the world.”

The Bank of England and HM Treasury confirmed that all depositors’ money with SVBUK is safe and secure as a result of this transaction.

Chancellor Jeremy Hunt said it was important to find a rescue deal for SVB UK that didn’t involve taxayer funds.

We were faced with a situation where we could have seen some of our most important companies, our most strategic companies, wiped out and that would have been extremely dangerous.”

Speaking before the announcement, prime minister Rishi Sunak insisted “our overall financial system is sound and there’s nothing to worry about there”.

Sunak was in close contact with Hunt during his 14-hour flight to the US yesterday where the PM will hold talks with Joe Biden and Australia’s prime minister Anthony Albanese.

Dozens of companies listed in London updated shareholders on their exposure to the collapse of Silicon Valley Bank and its UK branch.

But there has been more losses in the financial markets, with Europe’s main indices falling around 2%.

Investor have dumped bank stocks around the world. In London, Standard Chartered is down 6% with Barclays losing 5%.

In Switzerland, Credit Suisse fell 10% to a record low.

Some US regional banks are heading for hefty falls when Wall Street opens in an hour, with First Republic Bank currently down 64% in pre-market trading.

Investors are also tearing up their forecasts for further interest rate rises, concluding that central banks will be less keen to tighten monetary policy harder. SVB’s collapse last week came after it made a loss on bonds it had bought, before prices were pushed down by higher borrowing costs.

Investors are rethinking their forecasts for further rises in interest rates after the collapse of Silicon Valley Bank, says Richard Flax, chief investment officer at European digital wealth manager Moneyfarm.

Flax explains that the markets are concluding that the US Federal Reserve may be less hawkish this month, when it sets interest rates later this month. It may now restrict itself to a quarter-point (25 basis point) rise, he says:

“With the market turmoil following the collapse of SVB, there are now heightened expectations that the Federal Reserve will be less aggressive with its monetary policy.

In light of the potential stress on the banking system, the market is now pricing a greater likelihood of only a 25 bps hike at the next meeting (from an almost “certain” 50 bps pre-SVB collapse). The market’s expectation for the peak Fed Funds rate has also fallen sharply from where we were a week ago.

The next US inflation report, due tomorrow, could also move markets, Flax adds:

While the focus will remain on the stresses in the financial system, Tuesdays CPI release will give an important indication of how prices in the real economy are moving.”

Trading in shares in Italy’s Unicredit bank were briefly halted this morning, after they fell by almost 5% in Milan.

That triggered a brief circuit-breaker pause in trading in Italy’s second-largest bank.

But trading then resumed, and Unicredit are down almost 8%.

Back in Europe, shares in Credit Suisse have dropped to a new low.

Credit Suisse shares tumbled over 12%, and were trading below 2.20 Swiss francs at one state this morning, down from Friday’s low of 2.41 francs.

The cost of insuring Credit Suisse’s bonds against default has jumped this morning too.

Victoria Scholar, head of investment at interactive investor, explains:

Despite HSBC’s rescue deal, investors are taking a cautious stance towards the banking sector compounded by the fact that this could slow the pace of central bank rate hikes, creating a headwind for banks’ net interest margins.

Concerns over America’s regional banks do not appear to have fully abated, despite last night’s efforts by US authorities to shore up confidence.

First Republic, based in San Francisco, is not the only one under pressure (still down over 50% in pre-market trading).

PacWest Bancorp of Los Angeles has dropped 27% before Wall Street opens, while Phoenix, Arizona’s Western Alliance Bancorporation is on track to fall around 47%. State regulators closed New York-based Signature Bank on Sunday.

As covered last night here, a new facility is being set up to give US banks access to emergency funds, with the Federal Reserve also making it easier for banks to borrow from it in emergencies.

Plus, Silicon Valley Bank customers in the US will get full access to their funds, not limited by the restrictions on deposit limits.

But, the US authorities did refuse to bail out SVB – ruling that shareholders and certain unsecured debtholders will not be protected.

And other banks face the same problem as SVB: if they are forced to sell assets such as government bonds due to customers taking out funds, they may take a loss (due to the fall in bond prices due to higher interest rates).

Chris Weston, head of research at Pepperstone, suggests that customers could migrate to larger, stronger banks:

“The Fed are not only addressing concerns over the bank’s asset side of the balance sheet but on the liability side, where they are essentially stepping in front of a larger bank run, which…can be devastatingly swift to bring down any institution.

“There’s likely going to be further migrations to the stronger banks and those with a large asset base and low equity will continue to see depositors divest capital.”

Michael Purves, chief executive of Tallbacken Capital Advisors, cautions:

“There are still going to be lingering questions with other regional banks.”

The head of the Eurogroup, the gathering of eurozone finance ministers, has said the collapse of Silicon Valley Bank was a reminder that risk and moments of change can happen very unexpectedly.

Eurogroup President Paschal Donohoe also told Bloomberg Television in an interview this morning that the euro area’s exposure to the fallout from the collapse of SVB is very limited.

Donohoe insisted, ahead of a Eurogroup meeting in Brussels today, that:

“We’ve a very strong regulatory and resolution framework here in Europe.

“But of course any banking development such as this does prompt questions, and of course we’ll discuss this today in the Eurogroup.”

Nick Macpherson, the former top civil servant at the Treasury, has congratulated his former department and the Bank of England for agreeing the rescue deal for SVB UK this morning.

Macpherson says it shows that the UK’s bank resolution regime, introduced after the 2007-2008 financial crisis, is effective.

Shares in another US lender, First Republic Bank, have more than halved in pre-market trading.

That’s despite its efforts to try to quell concern about its liquidity after the failure of Silicon Valley Bank.

First Republic said in a statement late on Sunday that it had more than $70bn in unused liquidity to fund operations from agreements that included the Federal Reserve and JPMorgan Chase & Co.

It said:

“The additional borrowing capacity from the Federal Reserve, continued access to funding through the Federal Home Loan Bank, and ability to access additional financing through JPMorgan Chase & Co. increases, diversifies, and further strengthens First Republic’s existing liquidity profile.

However, its shares are down almost 60% in pre-market trading at $34.50, having dropped 15% on Friday to $81.76.

“It’s down to a sharp loss of shareholder confidence,” says Susannah Streeter at Hargreaves Lansdown to Reuters, adding:

The banks aren’t being bailed out, but depositors are, and worries about the viability of First Republic are growing… It’s highly likely that there has been a rush of more depositors withdrawing money.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:

SVB’s flash crash raised questions that other similar local banks in the US could also experience liquidity issues and may not be able to pay their depositors back, unless they also start selling their probably loss-making portfolios.

So, the likes of First Republic Bank, PacWest Bancorp and Signature Bank [which was closed by regulators last night] suffered heavy losses on Friday.

Across Europe, big banks pulled indices down on Friday, as well – even though they are not expected to have similar liquidity issues as the Silicon Valley Bank. Most big banks have a diversified client base and more importantly don’t have the same exposure to tech startups, which are extremely rate sensitive.

The contagion risk remains for small banks with highly rate-sensitive clients, but the US authorities now step in to avoid contagion. They said that SVB depositors could access their money today.

European stock markets have made a very weak start to the new week, as the turmoil which began last week continues to grip the markets.

That’s despite US regulators protecting Silicon Valley Bank deposits and trying to shore up the financial system last night.

AJ Bell investment director Russ Mould says:

“Despite the best efforts of governments and regulators, the market was still very edgy on Monday as investors considered the fallout from SVB’s collapse.”

The FTSE 100 index has tumbled by 153 points, or 2%, to 7595 points. That’s its lowest level since the first week of January, and around 6% below last month’s record highs.

Financial stocks are among the fallers in London, with Standard Chartered dropping 5%, investment manager Abrdn off 4.3%, and Barclays losing around 4.5%.

Europe’s STOXX bank index has dropped by 5%, having shed 3.78% on Friday, leaving it on track for its biggest two-day fall since Russia began its invasion of Ukraine in February 2022.

Mould explains:

“There’s plenty to worry about whether it be the conflict in Ukraine, inflation, rising interest rates and now a potential banking crisis has been added to the mix. Little surprise people are feeling a bit spooked.

“For now, the panic which set in late last week appears to have been contained but whether the market can regain the confidence which saw the FTSE 100 hit a record high earlier this year remains to be seen.

“The funding environment for technology and start-up companies is certainly looking a lot less healthy and focus may start to turn to the asset managers and private equity funds which are invested in these firms.”

Across Europe, Germany’s DAX share index has lost 2.9% while Italy’s FTSE MIB has slumped by4.7%.

Martha Lane Fox, president of the British Chambers of Commerce, said the failure of Silicon Valley Bank is “very different” from the collapse of Lehman Brothers in 2008.

She told BBC Radio 4’s Today programme this morning that SVB UK has played an important role helping to grow the technology and life sciences industry, and the wider economy:

“It was a banker that provided extra careful services for the sector that is growing very rapidly and is demanding attention from all of us because it’s going to be a vital part of how we position ourselves in the future and our economy’s strength in the future.

“You could argue it was a single point of failure, or you could argue that it was enabling this patchwork of incredible businesses to grow quickly.

This is not a collapse because of risky management, she insisted (although SVB management have been criticised for not protecting itself better against rising interest rates).

Lane Fox adds:

In many ways it’s not similar to the banking collapse in 2008 or Lehman’s collapse or anything like that.”

Krista Griggs, head of financial services & insurance at technology giant Fujitsu, says HSBC’s decision to buy Silicon Valley Bank UK is ‘a welcome move’:

“The UK technology industry is thriving and it requires a commitment to long-term success if the country is going to achieve its ambition of becoming a scientific and technology superpower.”

“HSBC’s fast response is a welcome move that will ensure continuity for businesses at risk from the collapse of Silicon Valley Bank. It shows commitment to innovation and I expect to see more involvement from traditional banks as they look to provide stability during disruption – as well as further union between them and FinTech companies as this sector continues to rapidly evolve.

There has been a flurry of UK tech companies telling the City of London this morning the details of their exposure to Silicon Valley Bank UK, or reassuring that they’re not a customer.

Diaceutics, technology and solutions provider to the pharmaceutical industry, asked for its shares to be suspended on the London AIM market today.

It says that most of its cash was held at SVB UK, and it was unable to access those funds in recent days.

In a statement released just as news of the HSBC rescue deal broke, Diaceutics says:

As of 9 March 2023, the Company held ?22.2m in cash and cash equivalents (31 December 2022: ?19.8m). Of this balance, approximately ?22.0m was held in SVB accounts, an ongoing requirement of its Revolving Credit Facility, with the majority (?19.8m) held at SVB UK.

Despite immediate efforts by the Company to move available funds to other banks before SVB was closed, these transactions remain pending and the Company has been unable to access any of its funds held by SVB.

This is a rapidly evolving situation and the Board remains hopeful that the funds held with SVB will become available, however it recognises that there is a risk that this may take time to resolve and full or partial recovery above the insurance limits may not materialise.

Clearly the situation did indeed evolve rapidly, with HSBC agreeing a rescue deal which means depositors money is safe.

Naked Wines says it has ?14m in “a cash sweep account” under which SVB acts as custodian for 3rd party money market funds, and a $60m asset backed credit facility, which is syndicated 50-50 between SVB and Bridge Bank.

But less than ?600,000 of its cash had potentially been risk at SVB accounts in the USA and UK, before authorities took action to protect depositors.

Naked Wines’ CEO Nick Devlin said day to day operations were unaffected, as Naked has ?17m of cash immediately available, adding “we don’t expect to incur any loss as a result”.

Global review company Trustpilot said SVB UK was its principal banking partner, but it still had alternative banking relationships that allow it to continue to operate.

Trustpilot says it had $36m held in SVB UK, of which $18m was “currently in transfer out of SVB UK but pending confirmation”.

It also had $19m cash on deposit with another bank, and $4.5m guaranteed by the US Federal Reserve following their announcement last night (that US SVB customers will get their money in full).

Several firms released statement saying they had no exposure to Silicon Valley Bank, including e-commerce platform THG, IT firm Instem, and biotech company Roquefort Therapeutics.

Central banks may be less willing to raise interest rates higher, following the crisis at Silicon Valley Bank.

Policymakers could now be warier of breaking something else in the financial system, by tightening monetary policy much further.

That’s because the steep increases in borrowing costs over the last year or so have pushed up the yield (or effective interest rate) on government bonds and mortgate-backed securities, which lowers their price.

That lead to SVB suffering a $1.8bn loss when it sold its $21bn package of securities last week, following an increase in customer withdrawals.

Investors have cut their expectations for future interest rate rises on both side of the Atlantic.

For example, another quarter-point rate rise by the Bank of England this month to 4.25% is only seen as a 66% chance this morning, from an almost certainty last week. Rates are no longer expected to rise above 4.5% this year.

Expectations of future interest rate rises in the US have also been dampened, having jumped last week after hawkish talk by Federal Reserve chair Jerome Powell.

Lee Hardman, senior currency analyst at MUFG Bank, explains:

The Silicon Valley Bank crisis has taken the wind out the US dollar’s sails by highlighting risks associated with rising rates.

The run on deposits forced SVB to realize losses on their securities portfolios that triggered a further loss of confidence in bank. It has made market participants more aware again that the Fed will eventually break something if it keeps raising rates.

The pound has gained over half a cent against the US dollar this morning, to $1.21.

Dom Hallas, executive director of Coadec, a lobby group representing UK tech start-ups, says today’s deal has “saved hundreds of the UK’s most innovative companies”.

Shadow chancellor Rachel Reeves MP has welcomed the news that Silicon Valley Bank UK has been rescued, saying:

“That SVB has a buyer will be a relief to the entrepreneurs and the thousands of people working in the tech and start-up sectors, who woke up facing huge uncertainty this morning.

Tech and life sciences are vital to getting our economy growing again.”