The Silicon Valley Bank crisis is far from over. Across the pond, the Financial Times has reported that larger institutions such as Citi and JPMorgan are being inundated with new depositors fleeing from the thousands of smaller US banks.

For context, it’s worth remembering that while US regulators have guaranteed the deposits of funds held at Silicon Valley Bank and Signature Bank, this protection has not been extended universally.

This leaves depositors elsewhere relying on the FDIC insurance, limited to just $250,000, akin to the £85,000 FSCS limit in the UK. Over 30% of US deposits are held in small banks in the states, and more than 50% of funds are above the FDIC limit.

With new CPI figures showing that annual inflation has slowed to 6%, Federal Reserve Chair Jerome Powell has an unappetising tightrope to walk this month: pausing or pivoting could see inflation become more entrenched or start to rise just as it looked like it might finally get under control, while continuing to increase rates could well see another unexpected economic ‘break.’

It’s clear that a banking crisis would be a much larger disaster than excess inflation, and Goldman Sachs has already predicted that there will no increase to the federal funds rate this month. But not everybody agrees — and it’s worth noting that virtually every analyst was predicting another increase just a week ago.

FTSE 100: HSBC buys SVB UK

The SVB crisis is sending ripple effects out across the world, damaging banking institutions large and small, with both perfect and imperfect records. The much-suffering Credit Suisse is at record lows after being forced to delay its annual report by the SEC, seeing £11 billion of outflows in 2022, and finding ‘material weaknesses’ in its reporting controls.

However, it’s helped that regulators have managed to salvage the UK-based branch of Silicon Valley Bank, allowing HSBC to purchase it for a single symbolic pound. After some 200 tech executives pleaded in an open letter for help, overnight talks between Downing Street, the Bank of England, and HSBC saw CEO Noel Quinn agree to protect the finances of SVB UK’s 3,500 customers, including Darktrace, Wise, and Trustpilot.

With £6.77 billion in deposits and a profit of £88 million last year, Quinn argues that the ‘acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms.’

This investment is a drop in the ocean for HSBC but allows it to benefit from the likely strong future growth of some of the UK’s best tech firms and will also buy significant political goodwill. It was also good news for a government with little good news to promote.

UK contagion fears

However, UK-based banks haven’t escaped the contagion. Despite recovering slightly, over the past five days, HSBC is down by 7%, Lloyds by 4.7%, Barclays by 8%, NatWest by 2.7%, and Standard Chartered by 12.5%. And the FTSE 100 has been dragged down by 3.9% by these financial sector stocks over the same timeframe.

Poor economic indicators are piling further pressure on the UK banks. Of course, if the Federal Reserve pauses its monetary tightening programme, then this will have implications for the sector. But there also were 1,783 corporate insolvencies in February — an increase of 17% compared to February 2022 — and a reminder that higher interest rates may not create the financial bonanza that FTSE 100 bank stock investors have long hoped for.

Lloyds CEO Charlie Nunn advised at a Stanley Morgan event earlier that British banks are not yet experiencing the ‘flight to quality’ seen in the US, noting that ‘what’s happened with SVB is relatively idiosyncratic compared to the UK.’ However, the CEO also warned that it’s worth seeing ‘how that plays out and we’ll see how people feel over the next period of time.’

The key question is whether there will be widespread contagion across the international financial system, and also whether this contagion will be limited to smaller lenders or impact on the larger institutions as well.

Other than share price movement, there seems to be no indications that the grander FTSE 100 banks are under any significant pressure other than from sentiment — which could make the current share price dips solid buying opportunities for those investors with a medium-term timeframe and a reasonable risk appetite.

On the other hand, many banks hold large portfolios of bonds, and despite maintaining the crucial liquidity that Silicon Valley Bank lacked to avoid its bank run, these portfolios are currently worth much less than they were only a few months ago.

And these large unrealised losses combined with the global interconnectedness and complexity of the international banking system means that further economic shocks cannot be ruled out.

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