RUTH SUNDERLAND: Small banks, big trouble?

Small banks can cause big problems. That was one of the lessons of the 2008 credit crunch, when a run on North East England mortgage lender Northern Rock was the catalyst for the near-implosion of the UK financial system.

So when the Bank of England tells us that Silicon Valley Bank (SVB) has a ‘limited presence’ in the UK and that it is ‘not critical’ to the financial system, those words should be taken with a high degree of skepticism.

What the Bank says is true, but that doesn’t mean there isn’t a serious problem: there is. On the face of it, it seems unlikely that it will be the catalyst for a repeat of 2008, although it is always dangerous to be too optimistic.

There are two immediate problems. First, the impact on the UK technology sector; and second, the possibility of contagion or other unexploded bombs in the financial system.

The threat to the tech companies that were clients of SVB in the UK is indeed taken very seriously. Bank of England Governor Andrew Bailey, Rishi Sunak and Jeremy Hunt were in talks this weekend about a bailout for the tech companies involved in the disaster, some of which are technically insolvent.

It is clear that the last thing the Prime Minister and Chancellor want is a wave of technical collapses. That would dash hopes of an innovative sector that could lift Britain out of the economic mire, just as Hunt presents his budget. Temporary help, possibly via the government’s British Business Bank, is useful. But this should not be a blank check.

Tech entrepreneurs tend to be young, very vocal and well connected in the media and Westminster.

That is in contrast to steel manufacturers, for example, who are also desperate for government support and are also crucial to the economy, but operate in an old-fashioned business in unglamorous parts of the country.

A solution must be found for technology companies that are being abandoned by the SVB and that do not bring unlimited subsidies from the taxpayer, while we are told that there should be corporate tax increases for other companies.

In terms of impact on the financial sector, SVB has a clear business model. It had a very high exposure to government bonds on its balance sheet, which meant it was highly exposed when interest rates rose. The tech companies on the books have also taken a hit – they thrive in a low interest rate environment, making borrowing cheap and investors more inclined to support riskier ventures.

Regular banks have more diverse customers. While they also have large bonds, they are hedged and have a higher proportion of other assets.

But it would be foolish to be complacent.

Banks are better capitalized and generally better managed than during the financial crisis. Still, there are plenty of snafus: the multiple disasters at Credit Suisse don’t inspire confidence, nor does former Barclays boss Jes Staley’s involvement with Jeffrey Epstein.

While SVB made headlines, another US institution, Silvergate, filed for bankruptcy last week after a run on deposits by its cryptocurrency clients.

In the UK, the small fintech-enabled Bank North went bankrupt last year.

Since the crisis 15 years ago, regulators have focused on big banks, on the reasonable grounds that they pose the greatest threat to the system. But to go back to the beginning: small lenders can create big ripples.