Rishi Sunak was on Tuesday warned not to weaken City of London regulation, including plans to relax rules for smaller banks, following the collapse of the UK arm of Silicon Valley Bank.
The prime minister and chancellor Jeremy Hunt have pushed for looser post-Brexit regulation of the City under the so-called Edinburgh reforms, but the SVB debacle has sparked calls for a rethink.
Lord Nick Macpherson, Treasury permanent secretary in the years before and after the 2008 banking crash, said: “The Treasury must be careful not to follow the US example and weaken regulation in the name of competition.”
Andrew Griffith, City minister, has insisted that the rescue operation for SVB UK, under which HSBC on Monday agreed to acquire the stricken bank for £1, showed that “the system has worked as intended”.
However, Treasury insiders accept that BoE regulators might in future have to give “more prominence” to the risks posed by a single sector — in this case the technology industry — having such a big concentration in a single bank.
SVB UK had an estimated 3,300 UK customers. More than 200 tech company executives at the weekend urged Rishi Sunak to help, warning that many faced an “existential threat” if they lost their deposits at the bank. US regulators shut down SVB UK’s parent company on Friday after a run on the California-based bank.
Chancellor Jeremy Hunt is pushing a financial services and markets bill through parliament which would give regulators a “secondary objective” of promoting economic growth and City competitiveness, alongside the main goal of financial stability.
Vicky Saporta, executive director for prudential regulation at the BoE, said last month that the legislation was “a big deal” and would “make a big difference” to the way it regulated banks.
But in the light of the SVB failure, Labour has called for a systemic review of the risks that rising interest rates pose to the UK financial sector.
Tulip Siddiq, shadow City minister, also asked the Treasury and BoE what assessment they made of “the significant liquidity risks arising from [SVB UK’s] deposit base being a small number of high-value corporate deposits”.
The House of Commons Treasury select committee will on March 28 take evidence from BoE governor Andrew Bailey about the collapse of the SVB UK and its sale to HSBC.
Harriett Baldwin, Tory chair of the committee, said: “While it’s reassuring that taxpayer funds were not required in this instance, a number of questions remain around the effectiveness of bank regulation and resolution procedures.”
Baldwin added that this was particularly an issue around “smaller banks with a significant presence in strategically important industries”.
Griffith told MPs on Monday that Bailey had said the UK banking system was sound and well capitalised, but added: “There are always opportunities for us to learn and look again.”
Experts predicted that the BoE was likely to come under pressure over its plans for a “strong and simple” regulatory regime for smaller banks, which is meant to reduce red tape and boost competition, including by exempting them from some of the rigours of the Basel global industry standards.
Simon Gleeson, partner at Clifford Chance and a special adviser to the Treasury committee, said the unravelling of SVB “does undermine the idea that smaller institutions should necessarily be excluded from some of the Basel rules”.
Gavin Stewart, a financial regulation consultant who spent 13 years at the Financial Conduct Authority and its forerunner, said the Edinburgh reforms were “predicated on the idea that the post global financial crisis reforms have done their job, but SVB shows that the jury is still out”.
The BoE declined to comment on whether there should be a rethink of its strong and simple regime following SVB’s demise.
SVB would not have qualified for the regime because its parent company was foreign and more than 85 per cent of its business was outside the UK.