The UK government had no choice but to do what the US government did and return all deposits held at the British branch of Silicon Valley Bank.The manner in which they did so, centered on what economists call a “private sector solution,” highlights not only the less complicated operational conditions confronting UK policymakers but also, and more interestingly, their stronger aversion to the twin risks of moral hazard and financial market co-option of monetary policy.
The UK Treasury and Bank of England declared at 7 a.m. Monday that they had “facilitated” the sale of SVB UK to HSBC, a considerably bigger bank, in a way that protected all depositors and provided them with instant and complete access to their cash. This came as a tremendous comfort to small tech companies in particular, which, like their counterparts in the US, had a large portion of their banking activity with a lender generally regarded as particularly friendly to their operations.
The method followed in the United Kingdom differs from that in the United States. The authorities chose a no-limit guarantee for SVB customers over the official method, which guarantees accounts up to $250,000. Concurrently, the Federal Reserve opened a special window for all banks to offer liquidity at favorable terms for a year in exchange for specified high-quality assets.
One explanation for this disparity is SVB UK’s substantially lower size. All in all, finding a buyer for a small institution is intrinsically simpler. It also implies that an existing massive bank, such as HSBC, does not get considerably bigger.
Nevertheless, there is more to the story. The UK authorities, particularly the Bank of England, have looked to be more reticent than their American counterparts in recent years when it comes to issuing broad guarantees, establishing lengthy financing windows, and allowing monetary policy to become captive to financial stability considerations. This very well might happen again.
Remember what happened in the UK when former Prime Minister Liz Truss’s “mini-budget” caused financial chaos a few months ago?In fact, the Bank of England had to help troubled liability-driven investment vehicles, but it did so on a set schedule and within certain limits.As evidence surfaced that the problematic institutions were not working hard enough to get their affairs in order, Governor Andrew Bailey issued a dramatic statement on a Tuesday night to warn them that the bank’s assistance would actually end on Friday, as previously indicated.
The Bank of England is worried that more open-ended help, especially if it is given to a lot of people, could make people take too many risks.It has also taken care to avoid the prospect of monetary policy being hijacked by financial stability concerns—a strategy that most economists would applaud, particularly while inflation remains a concern.
On the other side of the Atlantic, as the Fed worked to make markets less volatile, it seems to have been less worried about financial markets taking over its monetary policy.This has been seen in a variety of subtle ways during the previous several years, notably in 2018–19 and again in 2020–21. The markets have made it quite clear by reducing the possibility of the Fed raising interest rates by 50 basis points next week from two-thirds to zero. In fact, markets do not even support a 25-basis-point hike. Instead, the lack of increases is complemented by a much lower peak rate for this cycle.
This is an exaggeration of the Fed’s difficult trilemma. It has seen the policy path shrink to providing low inflation, limiting the harm to employment and the economy, and preserving financial stability after mischaracterizing inflation as temporary for too long and then being too cautious in its early reaction.
There was no ideal reaction to the SVB problem, as I wrote over the weekend. Under incredibly tight schedules, difficult decisions had to be taken. With a less challenging operating environment but also distinct policy biases, the Bank of England seems to have made better long-term decisions.