Regulators at the Bank of England are closely monitoring the UK banking sector, after the troubled tech lender Silicon Valley Bank was forced to shut by US regulators.
Regulators in California took control of SVB’s deposits on Friday afternoon, amid fears that turmoil at the bank – which developed quickly over the previous 24 hours – could put customers’ deposits at risk and lead to further contagion across the financial system.
SVB had prompted a global sell-off in banking stocks after it launched a rescue share sale to plug a near-$2bn (£1.7bn) hole in its finances.
The bank lost the funds when it sold a portfolio of bonds in response to a decline in customer deposits. Those bonds had dropped in value as a result of rising interest rates, leaving SVB with a shortfall.
Its US-listed shares initially plunged 60% on Thursday, and were halted on Friday after tumbling 66% in pre-market trading, before regulators stepped in.
The troubles facing SVB were relatively unique – given it serves startups in the tech sector, for which funding has dried up in recent months.
However, those troubles raised broader fears that the recent increases in interest rates have affected the value of other banks’ bond portfolios, which tend to fall in price when interest rates rise.
There were concerns about how that could affect lenders’ capital levels, which are meant to offset riskier parts of banks’ balance sheets.
Those fears prompted a drop in UK banking stocks, which the Bank of England’s regulatory arm, the Prudential Regulation Authority (PRA), is closely monitoring.
The Guardian understands the PRA is keeping an eye on market movements, and is speaking with firms it supervises – including high street banks such as Barclays, NatWest and Lloyds Banking Group – amid fears there could be further contagion from market jitters over the turmoil affecting SVB.
However, it is understood that the PRA believes that the UK banks it monitors are resilient, given that bond values are usually part of annual stress testing, and that most have seen their income rise as a result of higher interest rates in recent months.
The Bank of England decline to comment.
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In the US, the Federal Deposit Insurance Corporation said SVB’s insured depositors – who are covered up to $250,000 – would gain access to their funds no later than Monday morning, when SVB offices would be allowed to reopen. Those without deposit insurance will be paid an advanced dividend next week.
It was not immediately clear what the implications for SVB’s UK operations would be, though its roughly 3,5000 customers were understood to have been pulling deposits in light of the turmoil. That is despite the subsidiary having assured that its operations were “ringfenced” from the US parent firm, and that clients deposits were protected up to £85,000 by the Financial Services Compensation Scheme.
The intervention by US regulators appeared to have reassured investors, sending JP Morgan shares up 1.7% and Bank of America shares up 0.2%, Citigroup up 0.1% and Wells Fargo up 1.6% in afternoon trading in New York.
But the news came too late to lift UK stocks, which tumbled throughout the day as the crisis grew. Shares in NatWest closed 2.5% lower, Barclays fell nearly 6% and Lloyds Banking Group ended the day down 4.5%.
John Cronin, a financial analyst at the stockbroker Goodbody, said the earlier sell-off in UK bank stocks was unwarranted, given that deposits at most big banks come from the retail market rather than tech startups, and that those same lenders would have to unwind the “enormous” cash balances held by the Bank of England before selling off any of their investment portfolios. Furthermore, UK lenders also hedge risks linked to those portfolios.
“We don’t believe there is any readacross to the Irish and UK banks,” Cronin said, adding that the “likelihood of forced liquidation of investment securities portfolios in response to deposit flight for Irish and UK banks is pretty much zero”.
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