By Bob Lyddon – 3 minute read
AT FIRST Jeremy Hunt said there had been no taxpayer support for Silicon valley Bank (UK) – but then the Treasury’s statement said there had been ‘no taxpayer money’. I’m sure readers will agree there is a slight but important difference?
There is no doubt in my mind that the UK’s Ringfencing Rules – worked out over years with huge oodles of Parliamentary time – will have been bent for HSBC.
Economic Secretary to the Treasury, Andrew Griffith MP, sent a letter to the Treasury Select Committee about the process. SVB UK’s business will initially be held INSIDE the HSBC ringfence, including its high-risk loan book to start-up tech companies. Ideally, that business belongs in the non-ringfenced bank, ringfencing having been designed to insulate the current and savings accounts of UK consumers and businesses from fallout from a renewed blow-up in international / investment banking – like with SVB.
Having a £4-5 billion loan book of junk sitting inside the HSBC ringfence reduces the quality of HSBC’s UK arm, makes it more likely to go under, and makes a call on the Financial Services Compensation Scheme more likely, to fund which HM Treasury would have to issue more gilts – for which all UK consumers and businesses are responsible.
That dispensation qualifies as ‘taxpayer support’ in my language.
Of course, it is possible to say HSBC is large and well-capitalized and that the risk is remote, but:
1. an important principle has been broken (creating a moral hazard);
2. other UK banks can now come with special pleading; and
3. in truth, no UK banks are well-capitalized
SVB US’ strong capitalization was a fiction because it mis-valued $95bn of bonds at their cost or face value, not their market value. The difference was $15bn on 31/12/22, and their equity was $16bn.
The strong capitalization of UK and European banks is a fiction based on Risk-Weighting: the Common Equity Tier 1 Ratio looks high because the risk-bearing business (on- and off-balance sheet) is massively diminished via the Risk-Weighting process. Nothing comes out of that process at its nominal value and the average Risk-Weighted value is 30%. Then the tiny CET1 amount magically turns out to be 14% of the ‘Risk-Weighted Assets’ when it is about 4% of actual assets with no CET1 at all to take account of off-balance sheet risks.
I will have more to say on SVB and SVB (UK) as I discover more detail, but remember a principle has been breached and all is unlikely to be what it seems.
Bob Lyddon is an experienced management consultant both privately and with PwC, with a specialization in banking and payments. He has published numerous papers about the financial mechanisms of the EU, through the Bruges Group, Politeia and Global Britain.
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Photo courtesy of Number 10 – The Prime Minister welcomes the President of the European Commission, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=129116875