HSBC buys UK arm of stricken Silicon Valley Bank

HSBC Holdings is buying the UK subsidiary of Silicon Valley Bank for £1. The deal has significant implications for an estimated 2,000 UK-based fintech and insurtech firms, many of them start-ups.

UK chancellor Jeremy Hunt announced the bail-out deal, stating that: ”“HSBC is Europe’s largest bank, and SVB UK customers should feel reassured by the strength, safety and security that brings them.”

Noel Quinn, HSBC Group CEO, said, “This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.

Protection for tech start-ups

“We welcome SVB UK’s customers to HSBC and look forward to helping them grow in the UK and around the world. SVB UK customers can continue to bank as usual, safe in the knowledge that their deposits are backed by the strength, safety and security of HSBC. 

As at 10 March 2023, SVB UK had loans of around £5.5 billion and deposits of around £6.7 billion. For the financial year ending 31 December 2022, SVB UK recorded a profit before tax of £88m.

SVB UK’s tangible equity is expected to be around £1.4 billion. Final calculation of the gain arising from the acquisition will be provided in due course. The assets and liabilities of the parent companies of SVB UK are excluded from the transaction.

The transaction completes immediately. HSBC will update shareholders on the acquisition at its 1Q 2023 results on 2 May 2023.

It comes as US authorities act decisively to stem any wider contagion from the sudden collapse of its parent Silicon Valley Bank. It is the world’s biggest banking collapse since the Global Financial Crisis, which reached its peak in 2008.

Collapse highlights importance of liquidity risk management 

According to AM Best, the insurance sector has minimal exposure to the bank’s bonds. According to its data:

• Just eight companies have bond exposure to SVB greater than 2% of their capital and surplus – with the maximum being less than 5%.
• In the broader bank and trust sector, five insurers have equity exposure greater than their capital position, and 20 have exposure totaling at least half of their capital.

 Sridhar Manyem, senior director, industry research and analytics, AM Best, said:

SVB’s failure, along with the recent shutdown of Silvergate Bank, has caused a shock to a number of stocks in the banking sector. As we have already seen, some major bank stocks have lost significant value.

”Insurer exposure to the banking sector extends beyond stock price impacts though as many insurers depend on banks for lines of credit, distribution, hedges and other operational aspects.

”However, life insurers are not as vulnerable to short-term volatility and a run-on-the-bank scenario that we saw with SVB, or banks in general. Examples such as Equitable Life in the United Kingdom in 2001, General American in 1999 and Executive Life in 1991 demonstrate that the possibility exists, however remote, and emphasises the importance of ERM in general, and liquidity risk management in particular.

”Investment managers are navigating an interest rate environment that has not been seen in decades, and lessons from the past can help insulate from future mistakes.

”Stress testing and scenario analysis of the impact of rising interest rates on asset-liability management and proactive management of these stresses through strategic actions and capital management would be considered favourably for insurers with interest sensitive exposures.”