The last 72 hours have witnessed scenes reminiscent of the global financial crisis of 15 years ago.
In order to prevent the failure of the UK arm of Silicon Valley Bank (SVB) wreaking havoc across Britain’s burgeoning high-tech and bio-tech industries, Jeremy Hunt and the Bank of England had to move with extraordinary speed.
The purchase of SVB for one pound by HSBC — Britain and Europe’s biggest bank — is intended to send a signal to the world that the UK banking system is safe.
No taxpayer money has been spent and the Chancellor’s campaign to make the UK a hotbed of technological innovation looks intact. How long that will remain the case, however, is far from clear.
Despite attempts to prevent the collapse of SVB developing into a full-blown crisis, shocks are being felt across the US and on the Continent, where share trading in Credit Suisse and several Italian banks was suspended after steep falls.
In order to prevent the failure of the UK arm of Silicon Valley Bank (SVB) wreaking havoc across Britain’s burgeoning high-tech and bio-tech industries, Jeremy Hunt and the Bank of England had to move with extraordinary speed (stock image)
In New York, meanwhile, Signature Bank, which catered for the crypto-currency industry, has shut up shop.
And the landmark First Republic Bank, which towers above San Francisco’s financial district, has been offered a $70billion (£58bn) lifeline by the US central bank the Federal Reserve. And among America’s regional lenders there has been a bloodbath with stocks tumbling as much as 50 per cent.
If these signals from the US — the financial and technology centre of the world — are to be relied upon, we are entering a dangerously stressful period for the global economy, with the inflation and economic contraction caused by Covid-19 and Russia’s invasion of Ukraine barely behind us.
Indeed, efforts by the Federal Reserve, the Bank of England and other central banks to curb the cost of living crisis by rapidly raising interest rates have inadvertently contributed to the banking system’s current problems.
Widespread increases in interest rates have caused a fall in government bond prices — which is among the factors behind the current implosion. Government stocks are like a see-saw. When interest rates rise, the value of bonds falls and vice versa.
The Silicon Valley Bank invested cash deposited by its high-tech clients in long-term bonds. When it sought to dispose of them it took huge losses, triggering the current meltdown.
This is not dissimilar to the events of last September when Trussonomics led to the big sell-off of British government bonds, known as gilts, and endangered Britain’s billions in pension fund investments. The dominos have begun to fall in the US, leading the authorities to launch an emergency rescue and to move rapidly to erect a safety net for the country’s financial system.
American regulators have established a ‘Bank Term Funding Program’ which allows banks with cash problems to swap depreciating assets such as US bonds, mortgage-backed securities and other collateral for cash at the US central bank.
This is initially being funded by $25billion (£21bn) from the federal government’s exchange stabilisation fund, a resource that is activated at times of economic stress.
The purchase of SVB for one pound by HSBC — Britain and Europe’s biggest bank — is intended to send a signal to the world that the UK banking system is safe
It is estimated the American banking system currently sits on potential losses of $300billion (£250bn) of US government bonds, which it had intended to hold until they matured.
Events at SVB, Signature and First Republic show that the safety of government bonds is illusory if they cannot be easily exchanged for dollars.
The US Treasury and Federal Reserve hope that by putting in place a backstop they can prevent a repeat of 2008 when the collapse of the investment bank Lehman Brothers set off a global crisis which resulted in a deep recession.
On this side of the pond, Jeremy Hunt and the Governor of the Bank of England Andrew Bailey have so far managed to control the UK fallout from SVB without once again putting taxpayer funds on the line.
The bigger problem for Messrs Hunt and Bailey is how to ensure the current severe volatility does not impact the battle against inflation.
In his efforts to halve the rise in the cost of living this year, Hunt has already received some help from plummeting energy prices. But keeping interest rates high (to suppress inflation) and ending money-printing is a critical part of that battle.
Unfortunately, the classic response to financial and economic crisis is for central banks to do the opposite: lower interest rates and ease credit conditions so that consumer demand and businesses’ appetite for investment doesn’t fall off a cliff.
In the face of what financial markets describe as ‘deflationary’ shock, it seems inconceivable that the Fed in the US and the Bank of England will force interest rates any higher while the banking sector across the US and Europe faces turmoil.
Andrew Bailey and the Bank of England showed their willingness to step into the markets and rescue the pension system last autumn. If a fundamental risk to economic and financial stability develops they will follow the American lead and intervene — even if that means putting taxpayers’ money on the line once again.
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