RUTH SUNDERLAND: Small banks, big trouble?

Small banks can be big trouble, says RUTH SUNDERLAND: That was one of the lessons of the credit crisis of 2008

  • When Bank tells us SVB ‘not critical’, words should be taken with scepticism
  • What BoE says is true, but it doesn’t mean there isn’t a serious problem: there is
  • Unlikely to be catalyst for re-run of 2008, however, dangerous to be sanguine

Small banks can cause big trouble. That was one of the lessons of the credit crisis of 2008, when a run on Northern Rock, a mortgage lender based in the North East of England, was the catalyst for the near-implosion of the UK’s financial system.

So when the Bank of England tells us Silicon Valley Bank (SVB) has a ‘limited presence’ in the UK and that it is ‘not critical’ to the financial system, those words should be taken with a high degree of scepticism.

What the Bank says is true, but it doesn’t mean there isn’t a serious problem: there is. At first sight, it seems unlikely to be the catalyst for a re-run of 2008 though it is always dangerous to be too sanguine.

There are two immediate issues. First, the impact on the UK’s tech sector; and second, the possibility of contagion or of other unexploded bombs in the financial system.

The threat to the tech businesses which were clients of SVB in the UK is being taken very seriously indeed. Andrew Bailey, the governor of the Bank of England, Rishi Sunak and Jeremy Hunt were locked in talks over the weekend on a bailout for the tech firms caught up in the disaster, some of which are technically insolvent.

Lesson learned?: A run on Northern Rock was the catalyst for the near-implosion of the UK’s financial system

Clearly, the last thing the PM and the Chancellor want is a wave of tech collapses. That would put a blight on hopes for an innovative sector that could pull Britain out of the economic mire just as Hunt presents his Budget. Temporary help, possibly through the Government’s British Business Bank makes sense. But this should not be a blank cheque.

Tech entrepreneurs tend to be young-ish, highly vocal and well-connected in the media and Westminster.

That contrasts with, say, steel manufacturers, who are also desperate for government help and also crucial to the economy, but are in an unfashionable business operating in unglamorous parts of the country.

A solution for tech firms left high and dry by SVB must be found that does not involve open-ended taxpayer subsidies when we are being told there must be hikes in corporation tax for other businesses.

As for the financial sector impact, SVB has a distinct business model. It had a very high exposure to government bonds on its balance sheet, which meant it was heavily exposed when interest rates rose. The tech firms on its books have also taken a hit – they thrive in a low-rate environment which makes borrowing cheap and investors more amenable to backing higher risk ventures.

Mainstream banks have more diverse customers. Although they also have big bond holdings, these are hedged and have a higher proportion of other assets.

But it would be foolish to be complacent.

Banks are better capitalised and on the whole better run than during the financial crisis. Yet there are plenty of snafus: the multiple disasters at Credit Suisse do not inspire confidence and nor does the involvement of former Barclays boss Jes Staley with Jeffrey Epstein.

Though SVB hogged the headlines, another US institution, Silvergate, went into liquidation last week after a run on deposits by its cryptocurrency clients.

In the UK, small fintech enabled Bank North went into wind-down last year.

Since the crisis of 15 years ago, regulators have focused on large banks, on the sensible basis that these pose the biggest threat to the system. But, to go back to the beginning, small lenders can create big ripples.