Silicon Valley Bank

Statement

The following Statement was made in the House of Commons on Monday 13 March.

“With your permission, Mr Speaker, I will make a Statement on the steps His Majesty’s Government have taken to limit risks to our tech and life sciences sector.

Following the rapid deterioration of Silicon Valley Bank, and working in concert with the Bank of England, early this morning we facilitated the purchase of the UK subsidiary of Silicon Valley Bank by HSBC. Serving 39 million customers globally, and headquartered and listed here in the UK, HSBC is Europe’s largest bank. Those affected are now secure in the knowledge that their deposits are protected and that they can bank as normal. Customers should not notice any changes, while the wider UK banking system remains safe, sound and well capitalised.

Using stabilisation powers granted by the Banking Act 2009, which afforded us the ability to safely manage the failure of banks, we have forestalled disruption in the tech sector and supported confidence in the UK financial system. The resolution action was taken by the Bank of England in consultation with HM Treasury, using its powers to transfer the UK business of SVB to a private sector purchaser. As required by the Act, the Bank of England consulted the Treasury, the Prudential Regulation Authority and the Financial Conduct Authority on its assessment that all required conditions for that transaction had been met.

We have been able to achieve this outcome—the best possible outcome—in short order without any taxpayer money or government guarantees. There has been no bailout, and the actions taken are a win for customers, taxpayers and the banking system. The transfer of SVB UK to a buyer has allowed the Treasury to limit the risk to public funds by ensuring that shareholders and creditors, rather than depositors, bear losses. To help achieve that result, the Bank of England has made a related instrument bringing about a mandatory reduction of capital instruments in SVB UK, restoring it to viability. It is my view that, in this situation, the system worked as we would hope.

In order to ensure that the sale could proceed, the Government are using their powers under the Banking Act to provide HSBC with an exception to certain ring-fencing requirements. That was crucial to ensuring that a successful transaction could be executed, that the bank has the liquidity it needs, and that deposits and public funds are protected.

The outcome will provide security for some of the UK’s most innovative, fast-growing firms. The UK’s tech and life sciences sectors are world leading, hundreds of thousands of people are employed in them, and they make a very substantial contribution to the economy as a whole. My right honourable friends the Prime Minister and the Chancellor have been clear throughout that we will look after our high-tech sectors, and that is what we have done. The Bank of England has confirmed that, as a result of the swift, decisive action we have taken, depositors will be able to access their accounts. It is worth reiterating that, as the governor has said, the wider UK banking system remains safe, sound and well capitalised.

In concluding, I place on record my sincere thanks to my fellow Ministers across Whitehall, to officials at the Treasury and to regulators. They worked tirelessly through the weekend to grip the situation, to deliver this solution and to prevent real jeopardy to hundreds of the UK’s most innovative companies.”

My Lords, we recognise the indispensable role played by the UK life sciences and tech sectors. These drive growth and innovation across the economy, as well as creating and sustaining good jobs. We therefore welcome yesterday’s announcement that HSBC is buying the UK arm of Silicon Valley Bank.

As the Statement makes clear, this move protects SVB UK’s customers’ deposits, allowing them to bank as normal. That will allow a range of start-ups and scale-ups across the UK to continue their operations rather than having to deal with immediate financial and other pressures. We are grateful to officials at the Treasury, Bank of England and financial regulators for working at pace over the weekend to facilitate this agreement.

The collapse of SVB raises important questions about the risks taken by some financial institutions and their regulators. It is true that in the UK context the system established under the Banking Act 2009 has worked. However, my colleague Tulip Siddiq asked yesterday whether, at the time when SVB UK’s licence was granted, any assessment was made of the significant liquidity risks associated with SVB UK’s deposit base. I do not expect the Minister to answer that question today, but I should like an assurance that a review will be undertaken in due course or that Ministers will make themselves available to parliamentary committees for questioning.

Normal ring-fencing rules also had to be disapplied to allow HSBC’s acquisition. The Economic Secretary helpfully confirmed yesterday that this exemption will be permanent. Will the Minister go into more detail about any steps HSBC or SVB UK may be required to take in the future? If she is unable to do so today, perhaps she will write with further information prior to our debate on the “made affirmative” statutory instrument.

The Government are currently making significant changes to UK financial regulation. We support the broad thrust of this, as the financial services sector makes a significant contribution to the UK economy and its success will be key to future growth. However, as our many debates on the Financial Services and Markets Bill highlighted, we must balance risk and reward. Does the Minister have full confidence in all the regulatory changes proposed in that Bill and in the so-called Edinburgh reforms, which will come on stream later, or is it possible that the Treasury might wish to revisit some aspects of those initiatives in the light of recent events?

My Lords, I thank the Minister for repeating the Statement, albeit in the graveyard shift: she could have got in a bit earlier. Having read through the details of the events of the last weekend, I can understand why the Statement veers towards the slightly triumphalist: the sale of Silicon Valley Bank to HSBC averted existential problems for a huge number of UK tech businesses, and I am sure the Minister and colleagues are pleased to have done this. We should congratulate the Treasury and the Bank of England, as well as Coadec, Tech London Advocates and BVCA on the industry side, all of which came together very swiftly over the weekend. But where do we go from here?

First, can the Minister confirm that there will be a full investigation, both to confirm how this happened and, more importantly, what lessons can be drawn? One lesson we can all observe is that bank runs in the social media age happen in hours rather than days: the speed with which the run on this bank happened points, I think, to future issues if we ever came to them. As we know, Silicon Valley Bank’s UK wing oversaw roughly £7 billion in deposits from 3,000 entities across the country’s important tech industries and, contrary to US reports, it was not ring-fenced from its US parent. My first specific question is how we ended up in a situation where a huge proportion of a vital sector of the UK economy was reliant on one regional US bank. I am sure the answer is not simple, but it is important. For example, accessing connections to venture capital may have led banks to SVB, but there is also evidence that the traditional UK banks just do not have the appetite to take up this kind of business. Where will the tech start-ups go now for funding, especially in an environment where capital is getting more scarce?

History tells us that, when interest rates rise as fast and by so much as they have during the past period, bad things nearly always happen. It is a near certainty that one of two outcomes will occur: recession or a bank crash—sometimes both. I am sure we all hope that the failure of SVB, the closure of Signature Bank and the Tory-created crisis in UK government bonds and the pension sector are just outliers and do not herald something worse. They may, indeed, be one-offs; however, it seems to me that the Government, the Treasury and the Bank of England have to err on the side of caution. Can the Minister assure us that the tone of this announcement does not indicate a sense in our financial institutions that their work is done?

My Lords, as noble Lords have recognised, the course of events over the weekend was a good outcome for the customers of Silicon Valley Bank in the UK and an example of the Bank of England, in consultation with the Treasury, using powers granted by the Banking Act 2009, as part of the post-crisis reforms, to safely manage the failure of a bank and, in this case, facilitate its sale, which has protected those customers and taxpayers. I add my thanks to both noble Lords’ to the officials in the Treasury and at the regulators who worked tirelessly through the weekend to grip the situation and prevent real jeopardy to hundreds of the UK’s most innovative companies.

The noble Lord, Lord Tunnicliffe, asked whether any assessment was made of the significant liquidity risks associated with SVB UK’s deposit base at the time its licence was granted. Those authorisation decisions are for the independent regulators to comment on. However, requiring SVB to subsidiarise meant that it was independently capitalised from its parent in the US and had its own liquidity buffers. That brought the firm into the scope of the UK’s resolution regime. Had SVB UK remained a branch, it would have been resolved by the US resolution authority as part of action taken with respect to SVB.

That distinction is important to make in relation to a few of the points from the noble Lord, Lord Fox, in looking at the potential differences between the regulation and the regime in the US and the regime in the UK. However, there is read-across between the two. That is why we have measures in place to ensure that banks that are of systemic risk to different jurisdictions have cross-jurisdiction oversight, and that regulators work together on these matters.

The noble Lord, Lord Tunnicliffe, also asked about the ring-fencing changes made to facilitate the sale. To ensure the sale could proceed, the Government used powers under the Banking Act to provide HSBC with an exemption to certain ring-fencing requirements. This was crucial to ensure that a successful transaction could be executed, that the bank had the liquidity it needs, and that deposits and public funds were protected. We broadened an existing exception in the ring-fencing regime, allowing HSBC’s ring-fenced bank to provide intragroup lending to SVB UK. This should facilitate the smooth operation of SVB UK. In addition, SVB UK, which is now a subsidiary of HSBC’s ring-fenced bank, is not subject to the ring-fencing rules.

I know it is unconventional, but will the Minister advise us whether the lessons learned report is going to be published?

The Minister is getting a job lot of questions. I was hoping to hear her say that the shift in danger has gone from being just about liquidity to being about a lot of things connected with interest rates. We saw that in the autumn and again this week. When I suggested that the Treasury talk to the Bank of England about stress tests, I was suggesting not that the Treasury did the stress testing but that we would all be much more comfortable if we knew that shift had been taken on board and would inculcate future stress tests.

The point I was trying to make is that I am sure the Financial Policy Committee of the Bank of England will want to consider that. It updates its approach to stress testing both for banks and in its wider assessment of the risks to the financial sector more broadly. The noble Lord is not wrong in painting a picture of a changed context. We can also look at it for LDI, for example. While that is something for the FPC to take forward, I recognise the noble Lord’s points about that changed context. I hope that the points I made about how it holds its meetings and provides transparency about its considerations will reassure noble Lords about that process.

I will have to come back to the noble Lord, Lord Tunnicliffe, about the lessons learned and whether this reflection will be published. I do not know what form it will take. With the LDI process, interim findings have already been made public for people to take forward, but there is also further work. I imagine that a similar process may be followed here, but I will confirm this to noble Lords.

My Lords, I have been reading paragraph 11 of this Statement against paragraph 17. Paragraph 11 rather surprisingly says that

“the system worked as we would hope.”

Paragraph 17 notes that officials at the Treasury and regulators

“worked tirelessly through the weekend to grip the situation … and to prevent real jeopardy to hundreds of the UK’s most innovative companies.”—[Official Report, Commons, 13/3/23; cols. 560-61.]

As the noble Lord, Lord Fox, observed, it was lucky that it was a weekend. We surely do not want to have our financial sector and the stability of our economy dependent on that kind of luck.

Paragraph 11 states:

“the system worked as we would have hoped.”

If this is really how the system is supposed to work, I suggest that we need a new or at least significantly reformed system—a more secure, stable, less fragile system than what followed the collapse of the Silicon Valley Bank at the weekend. The noble Lord, Lord Fox, talked about the speed at which events happen these days. There is a Bloomberg article headlined, “The Digital Age Ushers In A Speedier, More Viral Breed of Bank Run”, and I think that was clearly demonstrated here.

The Minister mentioned the Financial Services and Markets Bill, which refers to maintaining the UK’s position as an open and global financial hub. Have not the events of the weekend demonstrated the extreme dangers of pushing that as far as we possibly can, and the dangers of Clause 24, on the competitiveness of UK markets, which the Finance Innovation Lab, among many others, has noted is a push towards deregulation—to reduce regulation and increase risk—when it is clear we cannot afford the amount of risk we have now, as demonstrated by this case and the events involving our pensions last October? As we speak, the situation with Credit Suisse in Europe is still very unclear, as is that of a number of US banks.