The past 72 hours witnessed scenes reminiscent of the global financial crisis 15 years ago.
To prevent the failure of the UK arm of the Silicon Valley Bank (SVB) from wreaking havoc on Britain’s burgeoning high-tech and biotech industries, Jeremy Hunt and the Bank of England had to move with extraordinary speed.
The purchase of HSBC – the largest bank in Britain and Europe SVB for one pound – aims to send a signal to the world that the UK banking system is safe.
Taxpayers’ money hasn’t been spent, and the chancellor’s campaign to make the UK a hotbed of tech innovation appears sound. However, how long this issue will remain is not clear at all.
Despite attempts to prevent SVB’s collapse from developing into a full-blown crisis, the shocks were felt across the US and the continent, with stock trading at Credit Suisse and several Italian banks suspended after sharp declines.
In order to prevent the failure of the UK arm of the Silicon Valley Bank (SVB) from wreaking havoc on Britain’s burgeoning high-tech and biotech industries, Jeremy Hunt and the Bank of England had to act with extraordinary speed (Stock Image)
Meanwhile, in New York, Signature Bank, which serves the cryptocurrency industry, has closed its shop.
The famous First Republic bank, which sits above San Francisco’s financial district, has been offered a $70 billion (£58 billion) lifeline by the US central bank, the Federal Reserve. And among America’s regional lenders there was a bloodbath as shares fell as much as 50 per cent.
If these signals from the United States – the financial and technological center of the world – are to be heeded, we are entering a period of serious stress for the global economy, with inflation and economic downturns caused by Covid-19 and Russia’s invasion of Ukraine barely behind us.
Indeed, efforts by the Federal Reserve, the Bank of England, and other central banks to curb the cost-of-living crisis by rapidly raising interest rates have inadvertently contributed to the banking system’s current problems.
Wide increases in interest rates have caused government bond prices to drop – one of the factors driving the current implosion. Government stocks are like a seesaw. When interest rates go up, the value of bonds goes down and vice versa.
The Silicon Valley bank has invested cash deposited by its high-tech clients in long-term bonds. When she sought to get rid of her she took huge losses, which led to the current meltdown.
This is not dissimilar to the events of last September when the Trusonomics movement led to a massive sell-off of UK government bonds, known as Government Bond Notes, and put Britain’s billions of pension fund investments at risk. Dominos have begun to fall in the US, prompting authorities to launch an emergency bailout and move quickly to create a safety net for the country’s financial system.
US regulators instituted a “Term Bank Financing Program” that allows cash-strapped banks to swap defaulting assets such as US bonds, mortgage-backed securities and other monetary collateral at the US central bank.
This is funded initially with $25bn (£21bn) from the federal government’s Exchange Stabilization Fund, a resource that is revitalized in times of economic stress.
The purchase of HSBC – the largest bank in Britain and Europe – SVB for one pound aims to send a signal to the world that the British banking system is safe
It is estimated that the US banking system is currently bearing potential losses of $300bn (£250bn) in US government bonds, which he intended to hold until maturity.
Events at SVB, Signature and First Republic show that the safety of government bonds is illusory if they are not easily exchanged for dollars.
The US Treasury and the Federal Reserve hope that by putting in place a brace they can prevent a repeat of 2008 when the collapse of the investment bank Lehman Brothers triggered a global crisis that led to a deep recession.
On this side of the pond, Jeremy Hunt and BoE Governor Andrew Bailey have so far managed to get the UK fallout from the SVB under control without putting taxpayers’ money on the line again.
The biggest problem facing Messrs. Hunt and Bailey is how to ensure that the current extreme fluctuations do not affect the battle against inflation.
In his efforts to halve this year’s cost-of-living rise, Hunt has already received some help from lower energy prices. But keeping interest rates high (to suppress inflation) and ending money printing is an important part of that fight.
Unfortunately, the classic response to a financial and economic crisis is for central banks to do the opposite: cut interest rates and ease credit conditions so that consumer demand and corporate appetite for investment do not fall off a cliff.
In the face of what financial markets describe as a “deflationary” shock, it seems inconceivable that the US Federal Reserve and the Bank of England would impose higher interest rates while the banking sector across the US and Europe faces turmoil.
Andrew Bailey and the Bank of England showed their willingness to jump into the markets and bail out the pension system last fall. If a fundamental threat to economic and financial stability develops, they will follow the American lead and intervene — even if it means putting taxpayers’ money on the line again.
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