In defence of old-fashioned British banks

How is it possible for a bank to collapse because it holds too many customer deposits – rather than too few, or too many bad loans? That was the mystery of the sudden failure of Silicon Valley Bank, America’s 16th largest, which had seen its cash holdings double to almost $200 billion during the pandemic period because its customers, mostly high-growth tech companies, were awash with venture capital funding that they could not immediately spend.

So they deposited it with SVB, which in turn invested a large portion in illiquid long-term fixed-rate mortgage bonds offering the highest yield available from a meagre range of choices. But as interest rates rose the value of those bonds plunged, and as word spread via social media that SVB had lost the equivalent of its entire capital, customers withdrew $42 billion in a day and sent the bank to perdition.

A special case perhaps – but that’s not how stock-market investors saw it. Bank shares tumbled across the world despite instant comfort for US depositors from President Joe Biden and an impressively swift rescue of SVB’s UK arm by HSBC, intermediated by the Treasury and the Bank of England. What’s most worrying is that this
is the second time rising official interest rates have caused serious unforeseen disruption, the first being the threatened collapse of UK pension funds after Kwasi Kwarteng’s mini-Budget.

Rate rises may now pause. But the point is that current circumstances have no precedent: we’ve never before emerged from a long period of ultra-cheap money, so we really don’t know what the ultimate consequences might be. And in previous moments of potential mayhem, we didn’t have social media to spread rumour and misinformation so instantaneously.