Why the UK Chose a Distinctive Strategy in SVB Intervention: A Comparative Analysis with the US

Henry Liu Updated on
Why the UK Chose a Distinctive Strategy in SVB Intervention: A Comparative Analysis with the US

Analysis | Why the UK Took a Different Approach Than the US on SVB Intervention

The UK authorities had little choice but to follow their US counterparts by making whole all those holding deposits at the British arm of Silicon Valley Bank. The way they did so, centered on what economists label a “private sector solution,” highlights not just the less difficult operational conditions faced by UK policymakers but also, and more interestingly, their stronger aversion to the twin risks of moral hazard and co-option of monetary policy by financial markets.

Size Matters

At 7 a.m. Monday, the UK Treasury and Bank of England announced that they had “facilitated” the sale of SVB UK to HSBC, a much larger bank, in a manner that protects all depositors and gives them immediate and full access to their funds. This was a huge relief to small tech startups in particular that, like their brethren in the US, had a significant part of their banking activities at a lender widely seen as especially sympathetic to their operations.

The approach taken in the UK differs from the one in the US. Specifically, the authorities there opted for a no-limit guarantee to SVB depositors, setting aside the official mechanism that insures deposits up to $250,000. In parallel with this, the Federal Reserve opened a special window for all banks to provide cash for one year at preferential terms in exchange for certain high-quality assets.

One way to explain this difference is by looking at the significantly smaller size of SVB UK. After all, it is inherently easier to find a buyer for a small institution. It also means that an already big bank, such as HSBC, does not become appreciably bigger.

Philosophy Matters Too

There is more in play. The UK authorities, and the Bank of England in particular, have repeatedly appeared in the recent past to be more hesitant than their US counterparts when it comes to offering widespread guarantees, opening yearlong funding windows, and allowing monetary policy to become hostage to financial stability drivers. Unfortunately, this may well be the case again.

Remember what happened in the UK a few months ago amid the financial turmoil triggered by the “mini-budget” of former Prime Minister Liz Truss? Yes, the Bank of England felt compelled to intervene to assist troubled liability-driven investment entities but did so with a communicated timeline and limits. When evidence emerged that the troubled institutions were not working hard enough to get their houses in order, Governor Andrew Bailey made a dramatic statement on a Tuesday night to remind them that the bank’s support would stop the coming Friday as originally announced.

The Bank of England has been concerned that more open-ended support, especially if it is generalized, risks encouraging excessive risk-taking. However, it has also been careful to minimize the risk of monetary policy being hijacked by financial stability considerations — an approach that most economists would commend, especially when inflation is still a problem.

On the other side of the Atlantic, the Fed seems to have been less worried about having its monetary policy co-opted by financial markets as it sought to calm volatility. This has been evident in several small ways in the last few years, including 2018-19 and 2020-21. However, markets are now making it obvious in a big way by taking the probability of a 50-basis-point interest rate increase by the Fed next week from two-thirds to zero. The markets are not even favoring a lower 25-basis-point increase. Rather…

Related Facts:

– The British arm of Silicon Valley Bank offers banking services to tech startups and venture capital funds.

– SVB UK’s deposits total about $4 billion, making it a relatively small bank.

– The UK authorities’ private sector solution has been praised for its simplicity and effectiveness.

Key Takeaway:

The UK’s approach to the Silicon Valley Bank intervention shows its stronger aversion to moral hazard and co-option of monetary policy by financial markets. The smaller size of SVB UK also made finding a buyer easier in a private sector solution that avoids the need for widespread guarantees or opening yearlong funding windows.

Conclusion:

The differing approaches of the UK and US authorities to the Silicon Valley Bank intervention highlight operational differences and philosophical ones. The UK’s private sector solution shows its stronger aversion to moral hazard and co-option of monetary policy by financial markets. At the same time, the US opted for a more open-ended approach to support financial stability.

 

Henry Liu

My name is Henry Liu, and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; my goal (and vision) is to educate every trader on how to take advantage of news trading and become more balanced traders.

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