In March 2023, Silicon Valley Bank (SVB) became the largest US bank to fail since the 2008 global financial crisis.
SVB bank owned a smaller bank based in the UK called Silicon Valley Bank UK. It showed signs that it would not be able to survive too.
At that point, we stepped in using the authority given to us by Parliament. Our aim was to avoid any wider disruption.
Was Silicon Valley Bank UK bailed out with UK taxpayers’ money?
Silicon Valley Bank UK was not bailed out with UK taxpayers’ money. Its business was transferred to another bank (HSBC). No UK taxpayers’ money was involved.
During the 2008 global financial crisis, the government needed to inject money into some banks. At that time, letting a bank fail wouldn’t have only been a problem for its customers. It could have threatened the UK’s whole financial system.
The situation has now changed.
Since 2009, the Bank of England has been working with banks (and other firms that provide financial services) to put in place a safety system.
This system is called ‘resolution’. It allows banks to fail safely, without causing harm to the wider economy. Or costing taxpayers a lot of money.
How did the Bank of England manage the failure of Silicon Valley Bank UK?
Thanks to the resolution process, we now have a few options when we intervene to manage the failure of a UK bank. One of those options is to close it down (putting it into insolvency). Other options include transferring it to a private company or taking it into public ownership.
With Silicon Valley Bank UK, the best option was to transfer its business to another stronger bank (HSBC). This means that all its services continued as normal. Its customers shouldn’t notice any changes.
Why are banks different to other firms when they fail?
Most businesses would be put into insolvency if they failed. It’s difficult for the company’s employees and owners. But its customers are usually able to find an alternative. It wouldn’t cause widespread disruption to the UK’s economy and financial system.
Banks, building societies, and some other financial firms are different. Lots of people, companies and public services rely on them in a big way for essential functions – like paying for goods and services and receiving their wages. Banks are also highly connected to each other, so the disorderly failure of one can lead to problems at others.
That’s why it’s so important we have a plan in place to manage a failing bank in an orderly way.
That plan is in place for all UK banks. It enabled us to act quickly when Silicon Valley Bank UK showed signs of difficulty.
We’ve used our resolution authority just two other times. In 2011 with Southsea Mortgage and Investment Company Limited and in 2009 with Dunfermline Building Society.
Whatever happens, people who have up to £85,000 in a UK bank account will never lose that money. Even if their bank goes bust. Those deposits are 100% guaranteed by what is called the Financial Services Compensation Scheme (FSCS).
Why did SVBUK fail?
SVBUK got into difficulty because its ‘parent’ company in the United States, Silicon Valley Bank, failed. This led to a loss of confidence in SVBUK and many customers withdrew their money. Without the support of its parent bank in the US, SVBUK could not survive on its own.
Silicon Valley Bank in the US also got into trouble because customers withdrew their deposits very rapidly. In order to pay those deposits back, the bank needed to sell assets quickly at a loss. This led to the failure of the bank and an intervention by the US authorities.
Are other UK banks likely to fail?
The UK banking system remains resilient, with a strong financial position and robust regulation.
It’s our job to make sure banks in the UK have enough financial resources kept aside, in case they ever need to use them.
We test this by putting major UK banks under regular ‘stress tests’. These are to test that the banks are resilient to even quite extreme economic scenarios – involving things like very bad recessions and much higher interest rates.
Even in the event that some banks do get into trouble, there are another two lines of defence. First, the Bank of England is able to provide short-term support to a bank experiencing temporary cash-flow problems. And second, we have the special resolution process. This means we can manage a failing bank in an orderly way. That protects the rest of the financial system and keeps disruption to customers to a minimum. It also makes sure taxpayers’ money is not at risk.