The Bank of England warned U.S. regulators about “concentration risk” at Silicon Valley Bank’s U.K. operations before the tech-focused lender failed, the central bank’s governor Andrew Bailey said.
In a letter to the U.K. Parliament’s Treasury Select Committee published Wednesday, Bailey also questioned the wisdom of the U.S. regulators’ decision to protect all SVB deposits beyond the $250,000 covered by federal deposit insurance rules.
Bailey’s communication set out the circumstances that led to the purchase of SVB U.K. by HSBC HSBC,
SVB U.K. was exposed to concentration risk, as it provided loans to and took deposits from the same relatively concentrated client base in the innovation sector, Bailey noted.
“Over the last 18-24 months, concentration risk, and overlap of clients on the asset and liability side of the balance sheet, had been areas of focus for supervision. The PRA discussed these with both the firm and the San Francisco Federal Reserve,” said Bailey.
As worries about SVB grew earlier this month, its U.K. subsidiary came under pressure and on March 10th SVB U.K. saw £2.9 billion ($3.6 billion) in deposit outflows — roughly 30% of the firm’s total deposit base.
It can be inferred from Bailey’s comments that the problems at the parent SVB were made possible by relatively lax regulation.
Since the global financial crisis of 2008, international authorities applied “significantly more robust regulatory standards, including for bank capital and liquidity…These include a liquidity framework and capital requirements that are calibrated to the risks faced by individual firms,” said Bailey.
“These apply to all U.K. banks, including smaller U.K. banks and building societies,” he adds, before later noting pointedly that SVB was “subject to a more limited set of regulatory requirements, relative to larger banks.”
The BoE governor also took a pot shot at the U.S. authorities’ decision to protect all depositors at SVB.
“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,” said Bailey.
And his final dig: “The U.K. deposit guarantee limit is set at a level which balances financial stability, moral hazard, and adequate depositor protection.” That guarantee limit is £85,000 in the U.K.