Andrew Bailey warns of ‘moral hazard’ after US bailout of SVB customers

·3 min read
Andrew Bailey
Andrew Bailey

Andrew Bailey has criticised the US government’s decision to bail out Silicon Valley Bank (SVB)’s depositors, saying the blanket guarantee increased the risk of “moral hazard” in the banking industry.

In a letter to the chairman of the Treasury committee, the Bank of England governor criticised the Federal Reserve and the US Treasury department for protecting all depositors at the failed lender.

He said: “A blanket guarantee of all depositors is not costless. It reduces the risk sensitivity of a bank’s funding, could result in moral hazard, and any costs would ultimately need to be borne by the taxpayer.”

Moral hazard is the fear that banks and investors will take large risks if they believe they will be protected from any potential consequences if things go wrong.

Mr Bailey contrasted the US’s blanket guarantee for SVB depositors with the Financial Services Compensation Scheme in Britain, which protects customer deposits only up to £85,000.

He said: “The UK deposit guarantee limit is set at a level which balances financial stability, moral hazard, and adequate depositor protection.”

On Tuesday, Janet Yellen, the US Treasury secretary, signalled that the US government could extend support to other smaller lenders in a bid to shore up confidence in the country’s banking system.

Ms Yellen indicated that she could provide further backing for deposits at smaller American banks if needed.

Mr Bailey’s comments add to a growing tension between Europe’s financial regulators and US counterparts, following a string of recent regional bank collapses.

European officials believe they are unfairly suffering from the consequences of a failure to properly regulate the US banking system. Swiss officials specifically highlighted the crisis in the US as a key cause of the near collapse of Credit Suisse.

Earlier this month Rishi Sunak, Jeremy Hunt and Mr Bailey were forced to engineer a late-night sale of SVB’s UK subsidiary to HSBC for £1, rather than bailing out its depositors.

HSBC was given an exemption from rules that do not allow complicated corporate customers to be housed within ring-fenced banks to get the deal over the line.

Ring-fencing requires banks to separate their retail banks from their investment and international banking activities. The rules were introduced as a response to the financial crisis to stop the blowups within investment banks hurting retail customers.

In a separate letter to Treasury committee chair Harriett Baldwin, Andrew Griffith, the City minister, said the ring-fencing exemption “was crucial for the success of HSBC acquiring SVB UK. It ensured that HSBC’s ring-fenced bank was able to provide liquidity support to its new subsidiary. This should facilitate the smooth operation of SVB UK going forward”.

HSBC pledged to inject £2bn into SVB UK to ensure that business-as-usual continued.

The rescue of SVB UK averted a crisis that risked chaos across Britain’s tech sector. The failure of SVB UK would have threatened the survival of thousands of British tech companies and investors who rely on the start-up-focused lender.

In his letter to Ms Baldwin, Mr Bailey revealed that customers had pulled £2.9bn from SVB UK – nearly one-third of its total deposits – in a single day on March 10.

The rapid bank run risked pushing SVB into insolvency. Only £306m of its total deposits were insured by the UK’s financial services compensation scheme at the time, meaning billions of pounds risked being locked in the bank without a sale or government intervention.