Seems like a great deal for HSBC? Presumably the competition regulator gives deals like this a free pass.
> As at 10 March 2023, SVB UK had loans of around £5.5bn and deposits of around £6.7bn. For the financial year ending 31 December 2022, SVB UK recorded a profit before tax of £88m.
It's said that no bank (even the best-managed) can withstand a fullscale bank run. So to the extent that the US side of things created a crisis of confidence, that might have been enough to topple SVB UK, even if all of its fundamentals were OK.
> It's said that no bank (even the best-managed) can withstand a fullscale bank run
I keep reading this but this should not be true
Any bank will hit liquidity issues on a full-on bank run, as not 100% of a banks assets will be marketable, but central banks will provide emergency liquidity in these situations
But banks should not hit insolvency issues like SVB did
The line is a little blurry. You can be underwater in mark-to-market terms on a bond portfolio, but be fine if you guess the timeline for redemption and can hold them to maturity. Banks estimate what percentage of their assets will be held to maturity. So needing extra liquidity causes insolvency.
the PV of a bond is the risk adjusted, discounted (at current rates) FV of the bond (and interim coupons). The losses are real, they don't magically come back, they just magically appear to realign like your ETA does as you get close to your destination after losing hours in a traffic jam.
I mean, the bank lost money. However if there is not a bank run they make enough off the interest of their deposits to be solvent. It's not unlike an airline owing more on their fleet than it is worth. As long as they keep doing airline things, they'll service their debt and be fine. If they don't, then they'll go bankrupt.
the rules of accounting say losses are only recognized when realized (mostly because they don't want you playing the game in the other direction and exaggerating your worth), but the cashflows and market prices tell the true story, a different story than book value.
You don't buy bonds (or mortgage backed securities), you buy the future cashflows they represent. Let's say you have a billion dollars, and you buy future cashflows worth a billion at a 2% interest rate, then interest rates jump to 6%: you still own the same future cashflows, but those cashflows are not worth a billion any more, they're only worth a third of that (give or take). now you don't have the flexibility to sell those cashflows to finance a billion in other investment activities. Now your stock is not worth what it was, so if you sell stock you get less to finance investment opportunities. Will your bank be OK if you hold what you hold to maturity? you will get the cashflows, which if you have perfectly balanced cash flows-in with cash flows-out means you break even, but (a) you didn't do that and (b) that's not the business you are in, to sit in stasis for 20 years: you are much less valuable, your opportunities have dried up, and current customers do not want to do business with you any more. Sharks have to keep swimming or they suffocate (which may not be true for sharks, but it is true for banks) A bank is not a treasure chest waiting to be dug up, it's a McDonalds that needs people to order fries with that.
Roku put something like $500 million into the bank, that money gets invested by the bank overnight into very safe govt paper, but during the day it is turned back into cash assets of the bank, and it disappeared going into Roku's account and without being turned into govt paper again. It is not the case that Roku will get its $500 million back by sitting on that paper, there is no paper and the cash is gone.
I think what made it worse here is that depositors of SVB were undiversified... If you had a bank that held deposits from various kinds of people, it's less likely that all of them would want their money out at the same time unless there was some of kind of widespread change in sentiment towards the overall financial system.
What made SVB even worse was that its customers were flush with VC cash and didn't need to borrow, so it looked elsewhere to make a return on the cash.
> Any bank will hit liquidity issues on a full-on bank run, as not 100% of a banks assets will be marketable, but central banks will provide emergency liquidity in these situations
That was not the case in the US for banks with HTM assets until the backstop program announced by the Fed in the wake of the SVB collapse.
> But banks should not hit insolvency issues like SVB did
SVB’s liquidity issues turned into solvency issues because of the absence of a liquidity backstop.
Treasuries are some of the most liquid instruments available, it is not a “liquidity” issue like “How do I line up buyers for all these weird, hard-to-price assets”.
And the measure put in place by the Fed is not a liquidity back stop, it is a value/solvency bailout, or kind of capital infusion. This is what SVB was trying to do on Wednesday, raise capital. That should tell you it is not a liquidity problem.
One of the actions was a program to loan against the full value of long term assets at term price instead of current market value.
Maybe we are just quibbling over the definition of liquidity. long term treasuries and MBS can be easily sold, but you may take a substantial loss in doing so instead of holding to maturity.
There's a certain amount of risk with all lending and investment that banks do with deposit funds. This can be home loans, government bonds, and other relatively safe products.
I don't think it should be up to the government to back these risks, because if banks think the government will always rescue them, they don't need to care as much about risky investments.
You could argue that it is depositor money, so they're not really saving the bank, they're saving customers. But if banks don't have to care about their risk profile, customers will deposit their money in whatever bank is offering the greatest interest rates, which will likely be those that are making the riskiest investments, which could lead to more bank failures with market swings.
> I don't think it should be up to the government to back these risks, because if banks think the government will always rescue them, they don't need to care as much about risky investments.
Counterpoint - if depositors had known that the bank could not lose their money, because the government will back it, there would be no run on the bank. Why bother? It's _safe_ by design. I do agree with the general point, and there are huge questions around capitalisation and marking with long term debt etc.
What's most interesting here to me is the inaction within SVB when they could have been fixing these problems for survivable losses early, but instead tried to ride the storm.
This isn't really feasible. Bank executives will fill fight the regulations that stabilize their bank against market swings, and citizens will demand that the government do something when irresponsible bank executives lose their life savings. Banking regulations, like most regulations, are written in blood, but for some reason, the banking sector is the most adept at getting regulations overturned.
So the resulting system is a patchwork of solutions that force the government into the role of rescuer. It's just too difficult to get most regulations to stick long enough to prevent another banking crisis. Barring a Constitutional amendment to create a banking "tsar" with broad authority and who reports to no-one (i.e., non-political), the best solution we have is to have the government step in when banks inevitably fail.
Oddly, it had been reported that the bidding process for the bank was 'competitive' and that there were several interested parties. I can't see how that could have been true if the final price was a token £1 ?
The token £1 is just a payment requirement for ownership. The bidding process for insolvent companies is essentially who will take on the most "problems" for the best outcomes for the business.
So one company may bid saying they want to acquire X parts of the company but can not take on the advertising arm or the quality assurance part of the company; which means jobs losses etc. Another company may say we'll acquire all of the company but not the freehold properties the business owns.
The liquidation team then have to decide which bid offers the best likely outcome for the creditors/business. The £1 isn't technically what they're paying for the company, as they're taking on debt, leaseholds, pension funds etc. Their bid is technically tens or hundreds of millions depending on the situation.
Usually the "buyer" is being paid to take it off the regulator's hands, so the actual price is negative. The token (positive) amount is to make it easier to deal with in a legal sense.
Thus the bids are for the lowest subsidy instead of the highest price.
Great play by HSBC. It's very interesting because some banks will make out very nicely in the comming weeks and some will be dragged down a lot by the general pull of the market. HSBC already found some "free money" right away. I think at least one of the big US banks will also print some money (I'd bet on JPM).
The US regulators really frown on the big banks snatching up failed bank assets. They allow it when they have to but the median regulator driven take over is done by banks in the same tier as the one acquired.
I actually wonder if that’s why the uk arm of svb was able to be purchased but the US one wasn’t. It’s probably just the relative size differences but I’m curious if the fdic got no bids for svb or didn’t get any it liked.
The FDIC generally doesn't do "bids" based on this article https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t... it seems that the FDIC basically just shows up at a competing bank, tells them their buying the failed bank, and that's the end of it.
My father, controller at a mid-sized regional bank, was involved in a couple of these when I was growing up, and worked at the FDIC as an examiner in the 80s. My memory from the last takeover he did shortly after this NPR article was that the FDIC had given him the vaguest of hints that his bank was on a list that could be selected to takeover a bank in the next month or so, then called him on a Wednesday afternoon, told him he needed to be half a state over by Friday morning (which I also gathered was a little out of norm but the FDIC person was someone my Dad had dealt with for a while and there was mutual trust) for a meeting, and then they took over the bank on Friday. There was the impression from my dad that they could have tried to refuse, but his bank wanted to expand in that area anyway, the FDIC knew that, and decided it would be best to have a larger, not-in-the-market-but-near-it bank take over this smaller community bank.
My dad also was the lead in his bank purchasing other banks in the 90s, and that was a months long, tiring and stressful process that they knew how to manage, and he said that receiving a bank from the FDIC was a different level of acute stress.
Edit Just unlocked a memory, I think one of the reasons that my dad's bank got selected was also that they ran the same backend banking software, since it was going to be a crash acquisition.
> got selected was also that they ran the same backend banking software
It can not be overstated just how important this would have been. These backed systems are complex, expensive and horrible. Implementing a (mondern) new backend at a bank is a multi year multi $10million process.
My dad's bank switched to $COMPANY in the late 90s and to this day, when I run into people who work for them (which happens from time to time since they have offices in my city), I have to suppress my inclination to dislike them, since it was such a brutal two years for our family when dad was working 70+ hours unendingly.
One point is that hsbc might not be acquiring all of the liabilities – they might mostly get customer deposits but not eg some unsecured loan or bond issue. Regulators could be ok with such an outcome because a bunch of businesses losing bank deposits may be seen as worse than a single company defaulting on its debt.
Another is that SVB UK could be solvent so long as they don’t have to sell assets at a loss. Being part of hsbc stops the assets needing to be sold at a loss. And a separate thing is that even if the assets net liabilities are negative, the customer relationships could be valuable enough to hsbc to counteract that. Hsbc get a load of growing companies whom they can try sell banking services to. That assumes customers don’t all flee, but I don’t think they would because there isn’t a particular reason to fear hsbc in the way there was for SVB.
I don’t know what the commenter meant about JPM printing money.
For sure that’s a reasonable possibility. But even if this in particular is -ve, I think it could still be a good deal for hsbc for the reasons given above and below.
They acquired a bunch of client assets for 1 GBP. Those client assets will generate money for them in the long term. For HSBC this is a great deal. For the clients too, come to think of it. On Friday the future of their money was uncertain, whereas today they can relax a bit because a big bank is backing them.
If you had deposits with SVB's UK arm before, congrats, you're now an HSBC customer.
There is a much lower chance HSBC experiences a bank run. Not to jinx it but the most likely outcome is that most customers are satisfied that HSBC is a well-capitalized bank and keep their money there, while HSBC gets to use their deposits and the bank's assets to sit comfy earning yield.
The public messaging on Friday from SVB UK was that they were entirely ring-fenced, all is well etc. But behind the scenes they were going to the Bank of England asking for emergency funding. So by Saturday the wheels were turning on the insolvency processes. I guess the US media was focussed on the US side of things, in the UK there has been a lot of noise about lots of UK startups having money tied up in SVB UK and how things need to be done to sort the situation.
If HSBC bought it for £1 (which is a minimal amount in order to have a binding contract) it does not mean that the deal is too good to be true. It means that the company actually has a negative net value, i.e. more liabilities than assets, and of course HSBC will take those liabilities on.
It's a bit like if you want to buy a house that has a mortgage and the deal is that to buy the house you have to take the mortgage on as well. How much cash would you be willing to pay for that? Potentially 0 (i.e. taking the mortgage on is enough for you).
It's not a multi-billion company, it a bank that has billions of loans and deposits (assets and liabilities). Yes, its a profitable bank but on order of magitude lower scale:
> It also logged a pretax profit of £88 million ($106.5 million) in its last fiscal year ended December.
I'm not sure you understand what's happening here or the basics of business and liquidation.
"Normal companies can't go bankrupt in one day" - They didn't go bankrupt. They went into liquidation. Massively different thing. You can have a company with billions of quid saved up in the bank that goes into liquidation.
Liquidation is quite common and happens daily in the UK to 'normal' companies. Companies that were profitable last week and no longer can operate as they're not profitable enough to pay their debts/what they owe.
I think your issue here is you don't understand what liquidation is/means and basic principles of business profits. The most important part is that while a company may be profitable at the 'end of year' -- They have to first get to the end of the year.
To me it sounds like you don't understand them either?
What you seem to be talking about about is cashflow insolvency. You can have a wildly profitable contract that pays in 120 days, but have no cash on hand to pay debtors. The work you are doing is profitable, you just can't afford to pay your debtors right now.
Profit != cashflow, that's why it's called cashflow insolvency instead of profit insolvency. You seem to be mixing up profit and cashflow.
But you're also talking about the wrong thing. These banks are not in cashflow insolvency. As far as I can see, these banks are going through what is called balance sheet insolvency. Their assets are worth less than their liabilities.
However, the assets are weird as the $100 bond they have is presently worth $78 even though in 10 years time it will be worth $100 again.This is because the interest the bonds pay is so low, no-one wants to buy it right now.
So their balance sheet doesn't add up, and as people started taking money out, they couldn't cover their liabilities. It LOOKED like their balance sheet was fine as they were valuing them at $100, but then they were forced to sell them and suddenly they have a big hole in their balance sheet.
So they're insolvent not because they've got a cashflow problem, but because their balance sheet doesn't balance. And the regulators stepped in to stop some creditors getting all their money out before that bank essentially went bust, leaving other creditors with nothing.
And now the regulators seem to be saying "we're going to guarantee that $100 bond is worth $100 even if you can only sell it for $78". By loaning people money up to $100 against it if they have one.
And they are claiming it won't cost the tax payer anything. But they're making 0% loans to banks when high inflation is happening, so the money they get back is going to be worth less than if they spent it on roads or healthcare, or whatever.
Maybe I'm wrong, and happy to be corrected, but it does seem what you're saying is wrong.
The money that they lose is going to be assessed on all FDIC banks. It doesn't come out of general government funds. So it'll probably be paid for by increasing bank fees on customers.
According to the news reports the Fed are guaranteeing the loans, not the FDIC. I think you're talking about the stuff that they were originally saying over the weekend.
Never thought about that. According to Mr Google; believed to come from the Latin phrase “quid pro quo,” which translates into "something for something," or an equal exchange for goods or services.
Wholly owned subsidiaries can have their assets swallowed up by their parent companies debts. So the bad debt can effectively "trickle down" as the assets are liquidated and passed up the structure. By forcing a sale now the BoE prevents American creditors from leapfrogging British ones...
Yes but its parent/owning company had gone bust. Lehman Brothers UK arm was also solvent (I think they had roughly £8B of assets after everything was wound up and the administrators bills were paid) but had no cash after the parent company went bust.
We don't know who bought SVB yet it will likely be announced tomorrow (EST/PST timezone) probably. The US gov announcing the full confidence of deposits wasn't merely an altruistic move, they likely had a buyer at the time of announcement and maybe a secondary commitment to support the mortgage debt which caused the whole thing.
You may be right, but the news coverage I've seen implies that the full backstop of all deposits regardless of size was announced because there is no buyer for SVB. Basically, there just wasn't enough time for buyers to feel comfortable with pulling the trigger.
Ah that's very possible. It makes sense their main objective was calming the market given other banks failing, committing ahead of time to finding a long term holder to the $90B mortgage security (in addition to the large set of stable depositor assets they held) was probably a much safer bet than the other options, regardless if a buyer fully committed to either asset group.
I’d guess (and it’s purely a guess) that it was their loan portfolio that made assessing their balance sheet hard to price. MBS’ and long term bonds can be priced using very standard techniques. Loans secured with startup equity warrants on the other hand are tough.
The announcement from Treasury, the Fed, and the FDIC was that depositors would be made whole and that there would be an assessment on banks to cover it. As such, I'd assume that there was no buyer.
> No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer... Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
While they say "no losses will be borne by the taxpayer", making banks pay who will then pass along those costs to their customers seems like a roundabout way of taxpayers paying - or at least a substantial portion of taxpayers who are banking customers. Maybe banks won't be able to pass along the costs through increased fees or lower rates and will have to eat the costs.
HSBC just restructured, I've been an HSBC US customer for 10 years including business banking, they're not going anywhere, just only serving high net worth and business now. I agree it would have been nice if they bought SVB, they'v been great for me with my startups, they're really good at business banking.
I want to build a business someday, and have always been interested on what to watch for when looking for a business bank as a founder.
Do you mind sharing why do you think HSBC is a good business bank and what are the typical qualities a business needs to have to be great for founders?
For me: Strong account manager who takes the time to understand the business, doesn't send you forms to fill in that don't have basic info already filled in for you, mostly don't bother you, when there are issues does most of the work to resolve them and only rely on you to do the last leg, don't offer products or services unless they're relevant, uses online tools like docusign or their internal equivalent, has good online banking, mostly doesn't bother you.
Over the long term SVB may have a positive net value, but unlocking that is likely to require short term cash injections to meet current liabilities (not to mention restaffing/integrating the bank). Those costs are the real price that HSBC is paying for SVB.
They bought £5bn of assets and liabilities and bunch of admin work integrating it all. I highly doubt anyone is bothering to break out the champagne for this one - it is a rounding error at best.
This isn't 4d giga brain chess stuff, its adults walking into the room. A meaningless tiny bank with assets and liabilities broadly matched has gone under - the regulator has stepped in, phoned around the market and somebody had to take it. £1 is the best they could do - and I expect that it is going to, directly at least, be a loss of money for HSBC all the same.
SVB parent group made 1.8bn last year - they are insolvent now.
From here HSBC will spend ~10mil on just the purchase legals. Then they will spend 100s mil when inevitably the equity / bond holders of SVB parent co sue them looking to adjust up the price, and their opening ask will be £1bn+.
All 3,000 business accounts (if there were that many) were up for grabs anyway so they could have had many using a photocopier and handing out flyers at silicon roundabout without any of the hassle.
HSBC looked at their own existing liabilities - looked at how many customers of theirs were paid from SVB (and paid their HSBC mortgages with the proceeds) and did the BoE a favour, and there will be a quid pro quo for that quid they paid at some point.
"And yeah, 80 million pounds of profit last year. I'd buy that for a dollar"
In business, last years profits are often irrelevant. This is a good example. It's a constant treadmill of trying to stay profitable - which isn't as easy as it sounds.
More so when businesses of this size are usually built on owing large sums of money.
Well, it might be more accurate to say they are taking on risk.
They are getting customers (the deposits owed to those customers is debt), but they will also be getting illiquid assets that should more or less cover the value of those deposits.
They will need to use their own liquid cash in the short term to cover any withdrawals. But in the long term they get to keep some of the customers and they should eventually profit when those illiquid assets mature.
Buying for £1 is a common thing in the UK for companies in distress. In reality it’s worthless so should be £0 due to the mountain of worth and risk they need to wade through to realise the value, but UK contract law requires some kind of consideration (I think that’s the right term, my contract law for engineers module was a while ago now) for both sides otherwise it’s not a valid contract.
The assets might be worth something, but the brand is shot - kept alone, it would have suffered the same sort of bank run that killed the parent entity. HSBC is buying their books and hoping that SVB UK customers will be assuaged into not asking for the money back, now that HSBC is looking after it. Eventually I expect all SVB UK accounts to be moved to HSBC equivalents.
Banks, at the end of the day, are just that: brands built on the belief that they will survive long enough to not lose your money. Once that belief goes, once the brand is over, a bank run is automatic and the bank dies.
It's was totally safe until Monday morning when all the depositors would leave.
HSBC has a huge Sterling reserve buffer that can easily accommodate that exodus. (Essentially HSBC UK becomes the depositor of last resort in SVB UK).
Remember that the issue with SVB was that it was taking duration risk when it hadn't the deposits to match that duration. The HSBC parent company can easily provide that duration.
Cashflow issues kill profitable operations. They kill banks in double quick time.
They were only saying that on Friday, by Saturday it was "following discussions with the regulators, we intend to enter liquidation on Sunday evening".
> HSBC on Monday averted a crisis in Britain’s tech sector by rescuing Silicon Valley Bank’s UK arm, a dramatic fire sale concluded after all-night talks led by Prime Minister Rishi Sunak and the Bank of England.
> A sale of SVB UK, which has 3,300 UK clients, including start-ups, venture-backed companies and funds, was the preferred choice of chancellor Jeremy Hunt, avoiding a big government intervention to protect depositors.
Fair point, so I will flesh this out a bit. The typical pattern we see in PMQs every week is this:
1. Valid concern from the opposition
2. Rishi ignores the concern
3. Rishi says something about "the member from Islington North"
4. Jeering from the back benches (both sides)
5. Opposition moves on to another topic
Or perhaps this:
1. Government back-bencher asks "Does the PM agree that we are doing a fantastic job on X?"
2. Rishi agrees
3. Rishi uses the time to grandstand about some other unrelated accomplishment
Perhaps this is more a criticism of the system than Rishi?
Still, I see no evidence that he is using his position of power to improve on this.
I don't know about the UK parliament, but the Canadian parliament is quite similar in political structure and the "debates" at the chamber are a bit of a clown show as well. Just someone doing a speech and zingers, the same side applaud, the other side boos, and it goes on and on for a few hours. If the population actually saw what was happening over there, they wouldn't be too impressed. The medias tend to only feature a couple questions and a couple (empty) answers, but they typically avoid showing us the circus.
But this has been like that forever, not very specific to any party or any PM.
So the Canadian parliament isn't directly elected by the people, like the British one? That's what everyone says is the difference. Seems to make the parliament members more "hype men" than lawmakers.
I kinda hate PMQs but I also don’t think it’s very relevant. In particular, the style doesn’t depend much on who is prime minister. If the jeering and cheering can be kept to an hour a week and most everything else is terribly dry, that feels ok to me. I think it’s important to judge people based on what they do that matters and not the things they do that don’t matter but are easy to point out and deride.
Sunak was as supportive as anyone of the lockdowns and other hysterical COVID madness that lead to economic turmoil that precipitated this situation in the first place.
They're already losing enough money with Marcus right now, why risk losing some more? Goldman needs to figure out how to properly run their existing consumer bank first.
Marcus is meant to focus on proper retail, which is a very different business to this. Buying SVB doesn't really achieve what Goldman wants from Marcus.
Because they do serve the UK, parent mentioned Marcus which is one of their UK consumer products. I don't know if they want to leave retail, but that's the sort of thing that can be different by region.
HSBC is a British bank with most of the profits being made in Asia (specifically Hong Kong). They may be selling off their unprofitable subsidiaries but the UK operations are pretty stable.
> HSBC is a British bank with most of the profits being made in Asia (specifically Hong Kong)
Funnily that's where their name comes from - Hongkong and Shanghai Banking Corporation Limited, HSBC for short (it's now the official name, HSBC does no longer stand for anything, probably to lessen the obvious imperialistic past in it's name).
The full name is still printed on most of our banknotes (alongside Bank of China and Standard Chartered who issue a smaller number of notes). I think it's just the parent company who deleted the original meaning.
IIRC, it stopped standing for anything when they moved the HQ to London in the 90s (following the takeover of Midland Bank), and it became HSBC Holdings plc.
> As at 10 March 2023, SVB UK had loans of around £5.5bn and deposits of around £6.7bn. For the financial year ending 31 December 2022, SVB UK recorded a profit before tax of £88m.