Bank of England says it warned US regulators over SVB risks before its collapse

The Bank of England warned US regulators over the risks building at Silicon Valley Bank well before its collapse, central bank governor Andrew Bailey told a British parliamentary committee.

In a letter to the cross-party Treasury select committee published on Wednesday, Bailey said that the BoE had been concerned about “concentration risk” and the “overlap of clients” between SVB’s lending and deposit books in the 18 to 24 months preceding its seizure by US regulators on March 10.

The BoE’s Prudential Regulation Authority “discussed these with both the firm and the San Francisco Federal Reserve”, Bailey wrote.

The letter provides fresh details on the diverging views among US and UK regulators of SVB’s financial health in the run-up to its collapse, which triggered the hasty sale of the bank’s UK subsidiary for £1 to HSBC.

Bailey said SVB UK suffered a “deposit run” on March 10, losing almost a third of its deposit base after US regulators took control of its parent company.

SVB’s depositors, largely drawn from the West Coast’s tech ecosystem, pulled out their money en masse when it emerged that the California-based bank was nursing huge losses on held-to-maturity securities as a result of surging interest rates. Its loans were also made mainly to the tech sector and the venture capitalists who funded it.

The concentration of clients was the “predominant” driver of the PRA’s assessment of how much extra capital SVB UK had to hold on top of standard regulatory minimums, alongside the bank’s exposure to changes in interest rates, Bailey said.

He also criticised the US authorities’ decision to ensure all SVB deposits beyond the $250,000 covered by federal deposit insurance rules.

“A blanket guarantee of all depositors is not costless,” Bailey said. “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.”

The UK deposit guarantee is set at £85,000, a level Bailey defended as one “which balances financial stability, moral hazard, and adequate depositor protection”.

The San Francisco Fed referred a request for comment to the Federal Reserve Board in Washington, which is conducting a review of how regulators interacted with SVB.

When Jay Powell, Fed chair, was asked at a press conference on Wednesday about the failure of regulators to react to SVB’s reliance on a small number of large depositors, he said: “Supervisors did get in there . . . They were on this issue. But nonetheless, this still happened . . . the nature of the review is to discover that.”

The BoE declined to comment beyond the letter.

Bailey defended the BoE’s record of supervising SVB in the UK, allocating one official part time to a bank with a balance sheet of more than £12bn. Bailey said the resource allocation reflected the bank’s risk to the BoE’s statutory objectives such as financial stability.

The BoE initially proposed putting SVB UK into resolution, because it was not systemically important to the UK, but eventually agreed to its sale to HSBC after the government and the UK founders argued that British start-ups would be disproportionately harmed if SVB UK was shut.

Bailey is due to give evidence to the Treasury select committee next week on the collapse of SVB, and the health of the UK banking system in light of recent stresses such as the rescue of Swiss lender Credit Suisse.

He reiterated his view that the UK sector remained “robust” and “resilient” in the letter.

Additional reporting by Brooke Masters in New York