In recent weeks you will have seen the headlines about the demise of Silicon Valley Bank (SVB). The California-based institution had grown to become the 16th largest bank in the US, and its collapse represented the biggest financial failure since the global financial crisis.
While swift action from regulators prevented a government bailout along the lines of those seen in 2008/9, the further troubles of Credit Suisse have spooked the financial sector, and it’s logical that you may be concerned we are on the brink of another banking crisis.
The demise of SVB also reminds us of some important issues when it comes to your savings and the protection that is on offer.
Read on for a summary of the events that led to the bank’s collapse, why it’s unlikely to have a contagious effect, and for a reminder on how to hold money to benefit from the maximum protection.
Rising interest rates and a “run on the bank” caused SVB’s failure
Many start-up and tech companies used SVB to hold the cash they used for salaries and other business expenses. As banks do, SVB then invested a large portion of these deposits, mainly in long-dated US government bonds. This was hardly a risky investment – indeed, the Guardian described these as “for all intents and purposes, as safe as houses”.
However, bonds have an inverse relationship with interest rates. When rates rise – as they have sharply done in the last year – bond prices fall. So, when the US Federal Reserve started to increase rates to combat inflation, SVB’s bond portfolio started to lose significant value.
Had SVB been able to retain these bonds until maturity, they would have received a return of their capital. However, the spike in the cost of living saw many deposit holders seeking to withdraw increasing amounts.
On 8 March, the bank announced that it needed to raise $1.75 billion to cover these withdrawal requests – a gap caused by the sale of these loss-making bonds.
This announcement spooked investors and customers, with CNBC reporting that customers withdrew a staggering $42 billion of deposits by the end of Thursday 9 March.
By the close of business that day, SVB had a negative cash balance of $958 million, according to the official filing, and failed to raise enough from other sources. “The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due,” the California financial regulator stated. “The bank is now insolvent.”
Regulators stepped in quickly to protect customers and the banking system
To protect customers and the banking system, regulators stepped in quickly once it was clear that SVB was going to fail.
In the UK, a safety system called “resolution” allows banks to fail safely, without causing harm to the wider economy and taxpayer funds.
With the UK arm of SVB, the Bank of England decided that the best option was to transfer its business to another stronger bank – in this case HSBC, who bought the UK arm of the stricken bank for £1. This ensured that all its services continued as normal and that customers didn’t experience any disruption to their activities.
In the US, the Federal Deposit Insurance Corporation (FDIC) insures bank deposits of up to $250,000 per depositor per bank for each account category. As most of the accounts in SVB held more than $250,000 of deposits, the Federal Reserve announced that it would invoke a systemic risk exception, meaning that all depositors would be made whole, even for those funds that were uninsured.
Are other UK banks likely to fail?
The failure of SVB and later Credit Suisse – bought by rival UBS – have raised concerns of another banking crisis.
However, regulators have been eager to reassure the public, with the Bank of England (BoE) saying: “the UK banking system remains resilient, with a strong financial position and robust regulation.”
Improved processes and regulation since the global financial crisis mean that it’s far less likely a financial institution could fail. The two lines of defence are:
- The BoE can provide short-term support to a bank experiencing temporary cashflow problems.
- The “resolution process” means a failing bank can be managed in an orderly way. That protects the rest of the financial system and keeps disruption to customers to a minimum.
These measures also ensure no taxpayers’ money is at risk.
A reminder about the protection you have for your savings
In the UK, the Financial Services Compensation Scheme (FSCS) protects up to £85,000 of your savings (£170,000 for a joint account) even if your provider fails.
Note that this limit is per person, per institution. So, if you have more than £85,000 in savings, it is worth thinking about spreading this money across multiple providers to benefit from maximum protection.
Remember also that some banking brands are part of the same umbrella organisation. For example, Halifax, Bank of Scotland, and Birmingham Midshires are all part of the same group, meaning you only receive a total of £85,000 protection for any money you hold across those three providers.
In certain cases, the FSCS may also protect qualifying temporary high balances up to £1 million, but only for six months after the money is deposited. This covers you if you have a high balance due to things like a property sale, an insurance payout, or an inheritance.
Get in touch
If you’re concerned about the failure of SVB and what it might mean for you, we can reassure you. Please email email@example.com or call us on 01189 876655.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.