Allowing Silicon Valley Bank UK to fail would have caused a domino effect, suggests FCA

Allowing Silicon Valley Bank UK to fail would have caused a ripple effect across the city, putting several regulated companies at risk of collapse, the head of the Financial Conduct Authority has said.

FCA chief executive Nikhil Rathi outlined the watchdog’s assessments in a letter to parliamentarians on the Treasury committee, detailing the busy weekend of March 10 that began with a bank run on SVB deposits UK and ended with the authorities facilitating HSBC’s takeover of HSBC. bank for just £1.

It said the FCA team, which grew to more than 60 employees over the weekend in question, began assessing the potential impact of the bank’s possible failure on Friday morning. It came as panic over the health of its California-based parent company, which was eventually shut down by US regulators, prompted many of the UK subsidiary’s nearly 3,000 employees to withdraw billions of pounds from their accounts.

“Over the next 24 to 48 hours, we searched and analyzed a wide range of information on SVB UK depositors to understand the degree to which SVB UK bank insolvency would cause harm to consumers and markets,” Rathi said.

“We identified that SVB UK held deposits for more than 130 FCA-regulated companies, including some companies that were holding funds for their own clients and others that had their operating capital with SVB UK.”

While the onus for the possible liquidation of SVB UK, which had around 3,000 clients, fell to the Bank of England, the FCA soon realized that allowing it to collapse into administration would have caused a domino effect, sinking several companies. from the city. supervised in danger and potential failure.

“From our supervisory interactions, it became clear that a number of FCA-regulated companies alone would have faced operational and liquidity problems if SVB UK went into administration, which could lead to their bankruptcy,” he said.

“Our analysis was also shared with Banco [of England] to support their decision making and ongoing consideration of resolution options.”

The Bank of England put SVB UK into administration just hours after US authorities shut down the parent company on March 10. However, clamor from customers soon pushed the UK government and regulators to act, trying to find a buyer to keep the bank afloat without taxpayer support.

Rathi said the FCA team, which “worked overnight and over the weekend”, began proactively reaching out to regulated companies to “alert them to the situation”, to understand the impact that bankruptcy SVB UK could take on its operations and companies’ contingency plans if the bank collapsed.

The authorities were also prepared to waive standard anti-money laundering controls for major banks, including HSBC, which had offered to take on SVB UK clients if a sale could not be secured, the FCA chief explained.

“In recognition of the exceptional circumstances, we confirm that we had no significant financial crime issues related to SVB UK and that we were happy (and would confirm in writing if necessary) that any bank onboarding SVB UK clients could rely on SVB UK due diligence. , with an extended time frame to allow them to complete their own due diligence checks,” Rathi said.

While a deal to acquire SVB UK with HSBC was reached just hours before the markets opened on Monday March 13, Rathi said the episode raised a number of concerns for the regulator. They included the impact sharp interest rate hikes have had on some businesses and financial markets, as well as the speed at which panic began to spread throughout the financial system, due in part to social media.

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He said it was also questioned whether deposit insurance schemes, which guarantee up to £85,000 of UK customer deposits will be returned if their lenders fail, are fit for purpose. “We hope to contribute to further examination of these issues and consideration of any reforms that may be necessary,” added Rathi.

Consumers were also feeling the effects of last month’s crisis, he said. “Recent events in the banking sector also add to existing economic headwinds that are contributing to cost-of-living pressures on consumers. We remain focused on ensuring that businesses provide appropriate support to those consumers who are at risk of experiencing financial hardship.

“We have told companies that they should step up now to support customers as they face economic challenges,” Rathi said.

In separate industry news, NatWest chairman Howard Davies has announced he will step down next year, ending a nearly decade-long tenure that involved one of the biggest corporate turnarounds in UK corporate history.

Davies, whose pending retirement has been rumored for years, made the announcement at NatWest’s annual general meeting in Edinburgh on Tuesday, explaining that the search for his successor would begin in the coming months.

“This will allow time for a rigorous search process and orderly handover, which I hope will take place sometime before he reaches nine years in office in July 2024,” he told shareholders.

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