20 March 2023: 200 firms at risk from SVB fallout


  • March rate hike in jeopardy
  • Fed likely to stick with twenty-five basis points
  • ECB leaves the markets guessing
GBP – Market Commentary

What does the Bank of England need to do about inflation?

The current turmoil in the banking sector brought about by the collapse of Silicon Valley bank in the U.S. could affect up to two hundred firms in the UK in the tech sector.

Rishi Sunak and Jeremy Hunt met with the Bank of England Governor, Andrew Bailey, to both put in place measures to shore up the banking sector and provide any necessary assistance to any suitors who wish to buy the UK arm of the failed lender.

HSBC remains the most likely buyer of the bank’s UK operations, although it is thought that both J.P. Morgan and Goldman Sachs are also interested.

A survey conducted over the weekend found that around 350 UK companies have accounts with the bank while, of those, 200 consider the bank their primary financial partner.

This means that those firms will either struggle to gain access to their funds or will be unable to use working capital facilities. It is believed that two and a half billion pounds of capital is tied up in accounts of UK tech firms.

The CEO’s of 140 tech startups wrote a joint letter to the Chancellor over the weekend in which they called for urgent action.

The Monetary Policy Committee meets this week, and until the storm over Silicon Valley Bank broke, it was expected that a further interest rate increase of twenty-five basis points would be agreed. Although the hike in itself will have no material effect on the current turmoil, it is unlikely that the Bank will want to be seen raising interest rates at the current time.

Elsewhere, the condition of the property market is also raising alarms that are a direct consequence of the Bank’s monetary policy. House prices are tumbling, while the number of new housing projects being started has halved over the first three months of the year.

Two of the three independent members of the MPC have called for a halt to the tightening of monetary policy. While a third, Catherine Mann believed until recently that inflation is far and away the biggest threat to the economy. It will be interesting to note if she lowers her level of rhetoric as inflation threatens to be overtaken by possible fractures in the global financial market.

Last week, Sterling had something of a rollercoaster week. It suffered as risk appetite fell as the first news of the collapse of two banks in the U.S. broke but managed to regain ground as fears that it could lead to wholesale insolvencies were thought to be unfounded. Over the week it managed to gain ground, reaching a high of 1.2204 versus the dollar, and closed at 1.2174.

The Bank of England meeting on Thursday dominates the week, although news of any further turmoil in the market will see volatility increase.

USD – Market Commentary

Loosening regulation behind the SVB crisis

Margaret Warren, the Democrat Senator for Massachusetts, unleashed her full fury on Fed Chairman Jerome Powell over the weekend. She blames Powell, a Republican, for unpicking regulation that had been put in to ensure that a situation provoked by the collapse of a single financial entity, as has been seen over the past week, isn’t able to escalate into the current situation that has seen equity markets fall dramatically.

Warren feels that the Fed has been too soft in its fight with inflation over the past year, and the time it has taken for interest rates to reach a restrictive state has been due to Powell’s concerns for share prices.

She went on to say that she believes that Powell has failed in his role and shouldn’t remain in his role of Chairman.

She believes that Powell has taken a flamethrower to regulation of the financial markets in order to help his pals on Wall Street. Furthermore, she believes that ex-President Trump shoulders some of the responsibility, since ultimately he was responsible for the level of deregulation that took place during his time in office.

Bank CEOs have taken advantage of the situation by loading their balance sheets with more and more risk in search of greater profits, which has left them exposed to just the situation that is unfolding now.

The Federal Reserve reached an agreement with the Bank of Japan, Bank of England, Bank of Canada and the European Central Bank over the weekend to ensure that there is ample dollar liquidity in the major markets to ensure there are no issues. If a borrower in, say, the UK, a business needs to borrow dollars but is facing liquidity issues with their lenders, they can go direct to the Bank of England who will be able to source supply from the Federal Reserve.

The turmoil in the financial markets has likely ensured that the FOMC will only hike by twenty-five basis points when it meets this week. There is a possibility that it will take the opportunity to pause completely, given the optics of hiking rates at a time of heightened turmoil.

Whether a hike takes place or not, inflation is not going away, and it will mean that the Central Bank will still be raising rates well into the second quarter.

Risk appetite was the major driver of the dollar index last week. There was significant safe haven buying of the Greenback, which drove it to a high of 105.10 but the realities of the instability caused by the collapse of SVB saw sellers return, and it closed at 103.87 having fallen to 103.44.

EUR – Market Commentary

OECD calls for more hikes

Although there has been significant progress made over banking supervision within the eurozone since the financial crisis, Brussels has still been lenient on financial institutions, allowing them eight years to capitalize bad loans rather than the traditional six.

This has allowed the ECB to consider that the financial sector is exhibiting a level of strength that is something of a fallacy.

The fallout from Credit Suisse having to allow itself to be bought at a fire sale price by Union Bank of Switzerland will be felt across the entire region.

At the height of the race for growth seen in the financial services sector that led, in part, to the financial crisis, the two major Swiss banks were prominent players globally, but Credit Suisse has fallen a long way and faced collapse before calling on the Swiss Government for help which resulted in the authorities brokering its sale to UBS.

In the quite recent past, it would have been unthinkable from a regulatory standpoint for the two banks to join forces. They share very similar business models and customer bases. The all the eggs in one basket approach that has been adopted by Swiss regulators will need to be monitored closely, as the new institution will truly be too big to fail.

There is a major risk running through the eurozone capital markets from the sale of Credit Suisse to UBS. Christine Lagarde made mention of the contagion concern as she spoke at her press conference, which followed the Central Bank’s decision to hike rates despite the ongoing turmoil.

Lagarde promised support for any banks in the region facing liquidity issues, particularly in sourcing dollars. The entire banking sector ended the week around 7% lower as investors felt a chill wind blowing through the market.

With headline inflation still at 8.5% and only falling very slowly, the hawks on the Governing Council still believe that despite the mayhem going on around them that inflation remains the number one threat to the economy.

The newest member of the Eurozone, Croatia, saw double-digit inflation in February and will quickly need to adopt tighter fiscal measures if it is to see any benefit from joining the EU.

Last week, the euro was buffeted by the storm generated by the collapse of SVB. It suffered higher volatility but ended the week higher at 1.0669 having earlier climbed to a high of 1.0758.

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.