It’s Saturday and so I don’t normally blog as that type of behaviour is just plain weird. However, I wanted to write a quick piece about what I think is the most important thing that has happened for a while and you’ll hopefully be relieved to know that I’m not going on about Gary Lineker.
Silicon Valley Bank (SVB) has been closed down by regulators in the US. The reason it got itself into such a situation seems to have all the hallmarks of a good old fashioned bank run (despite it not being a good old fashioned bank). Bank runs are fascinating for economic nerds like me (I do research into recessions and how complex financial products helped trigger the Great Recession) and last year’s Nobel Prize in Economics was jointly awarded to two economists for their work on them. Their consequences can also be devastating for the wider economy and can cause untold misery to millions.
However, I want to focus on the Bank of England’s response to it all. While SVB is a US bank, it does have a UK arm (unimaginatively named SVB UK). The Bank of England issued a statement last night which you can read here. Essentially it’s saying that deposits are safe up to £85,000. The Bank doesn’t seem to be too concerned as it states that ‘SVB UK has a limited presence in the UK and no critical functions supporting the financial system’.
That’s it. That’s all we’ve got so far. Now while it’s true that SVB UK has a limited presence in the UK and no critical functions supporting the financial system, this underplays the significance of SVB UK and suggests that the Bank has not grasped the seriousness of the situation. SVB UK is not a major bank (most people had probably not heard of it before today) and so it’s nowhere near on the scale of a Barclays or a HSBC for example. Moreover, SVB is no Lehman Brothers and so its collapse and so we probably should fear contagion or that the entire financial system will collapse. Ordinary people will still be able to get their money out at the cash machine and pay their bills. The vast majority of firms will also be fine.
However, SVB UK does play a critical role in the UK technology and venture capital ecosystem. Approximately 30 per cent of UK startups are directly dependent upon SVB UK. Startups – especially in technology – are the backbone of the UK economy and are the driving force behind growth and innovation. Therefore, it is clear that SVB UK does in fact play a critical role in the UK economy.
As I’ve already explained, deposits for individuals are protected up to £85,000. Things are slightly different for small businesses, but being able to claim back more can be tricky and certainly not straightforward. As such, a significant proportion of startups may not be able to pay their staff and be forced to stop operating completely this month. The Bank’s response so far has been unsatisfactory and it has been left to organisations such as the wonderful Coadec to keep startups in the loop (you should also back their campaign to save R&D tax credits).
Communication really does matter when it comes to central banking. When central bankers make bold and clear statements such as the one by Mario Draghi when he was the President of the European Central Bank where he pledged to do ‘whatever it takes’ to save the Euro it can have really positive impacts. When central bankers and other officials are slow to act, their communications are muddled, and they don’t seem to fully grasp the seriousness of a situation then the opposite tends to be true. The Bank of England needs to get much better at this.
The government should ordinarily not be in the business of bailing out companies or industries. If they have made unwise investment decisions or are being outcompeted by rivals whether in the UK or other countries, taxpayers should not be forced to bail them out. The obvious exception was the bail out to the banking sector during the Global Financial Crisis. Given its critical role to the UK economy, the then Labour government and the Bank of England were right to act as they did. Thanks to their actions and those of governments and central banks in many other countries, the Great Recession was dreadful but at least it wasn’t a depression.
SVB UK isn’t on the same scale, but it does play a crucial role for a very important part of the UK economy. If tech startups fail then the UK will miss out on innovative goods and services, many of which have the potential to dramatically improve our lives – especially in the health tech sector. It’s also important to point out that many startups had to exclusively use SVB UK and so they could not diversify in order to minimise their risk so they are not to blame.
As such, some form of urgent intervention from the Bank of England and HM Treasury needs to take place over the weekend. Otherwise viable startups should receive assistance from the government and any purchase of SVB UK should be contingent upon depositors being paid 100 per cent.
If this does not happen then I’m really not sure how the Chancellor can deliver his Budget on Wednesday. There will no doubt be a lot of rhetoric about the UK’s fantastic tech and startup sectors and nice words about unleashing innovation in the UK. This will ring hollow if thousands of UK startups are allowed to fail.