Allowing Silicon Valley Bank UK to fail would have caused a domino effect across the City, putting a number of regulated firms at risk of collapse, the boss of the Financial Conduct Authority has said.
The FCA’s chief executive, Nikhil Rathi, outlined the watchdog’s assessments in a letter to MPs on the Treasury committee, as he detailed the hectic weekend of 10 March that started with a bank run on SVB UK’s deposits and ended with authorities facilitating HSBC’s takeover of the bank for just £1.
He said that the FCA’s team – which swelled to more than 60 staff over the weekend in question – started assessing the potential impact of the bank’s potential failure on the Friday morning. It came as panic over the health of its California-based parent company – which was eventually shut down by US regulators – caused many of the UK subsidiary’s nearly 3,000 staff to pull billions of pounds from their accounts.
“Over the next 24 to 48 hours, we sought and analysed a wide range of information regarding SVB UK’s depositors in order to understand the degree to which a bank insolvency of SVB UK would cause harm to consumers and markets,” Rathi said.
“We identified that SVB UK held deposits for over 130 firms regulated by the FCA, including some firms who were safeguarding funds for their own clients and others holding their operational capital with SVB UK.”
While responsibility for the potential wind-up of SVB UK – which had about 3,000 customers – sat with the Bank of England, the FCA soon realised that allowing it to collapse into administration would have caused a domino effect, plunging a number of City firms it supervised into distress and potential failure.
“From our supervisory interactions, it was clear that a number of FCA solo-regulated firms would have faced operational and liquidity problems if SVB UK went into administration, potentially causing them to fail,” he said.
“Our analysis was also shared with the Bank [of England] to support their decision making and ongoing consideration of the resolution options.”
The Bank of England put SVB UK into administration just hours after US authorities shut down the parent firm on 10 March. However, customer outcry soon pushed the UK government and regulators into action, trying to find a buyer that would keep the bank afloat without taxpayer support.
Rathi said the FCA’s team, which “worked overnight and through the weekend”, started proactively contacting regulated firms to “alert them to the situation”, understand the impact that SVB UK’s failure might have on their operations, and the firms’ contingency plans if the bank collapsed.
Authorities were also prepared to waive standard anti-money laundering-checks for high street banks including HSBC, which had offered to take on SVB UK customers if a sale could not be secured, the FCA boss explained.
“In recognition of the exceptional circumstances, we confirmed that we had no significant financial crime concerns relating to SVB UK and that we were content (and would confirm in writing if required) that any banks onboarding SVB UK customers could rely on SVB UK due diligence, with an extended period of time to enable them to complete their own due diligence checks,” Rathi said.
While a deal to takeover SVB UK was reached with HSBC just hours before markets opened on Monday 13 March, Rathi said the episode raised a number of concerns for the regulator. They included the impact that steep interest rate hikes have had on some financial firms and markets, as well as the speed at which panic started to spread throughout the financial system – due in part to social media.
He said there were also questions raised over whether deposit insurance schemes – which guarantee that up to £85,000 of UK customer deposits will be returned if their lenders collapses – are fit for purpose. “We look forward to contributing to further examination of these issues and the consideration of any reforms which may be required,” Rathi added.
Consumers were also feeling the ripple effects of last month’s crisis, he said. “Recent events in the banking sector also add to existing economic headwinds that are contributing to the cost-of-living pressures on consumers. We remain focused on ensuring firms provide appropriate support to those consumers who are at risk of experiencing financial difficulty.
“We have told firms they should be stepping up now to support customers as they face into economic challenges,” Rathi said.
In separate news from the sector, the NatWest chair, Howard Davies, announced he will step down next year, ending a near decade-long tenure that involved one of the biggest corporate turnarounds in UK corporate history.
Davies, whose pending retirement has been rumoured for years, made the announcement at NatWest’s annual general meeting in Edinburgh on Tuesday and explained the search for his successor would begin in the coming months.
“This will allow time for a rigorous search process and an orderly handover, which I expect will take place at some point before I reach nine years tenure in July 2024,” he told shareholders.
