The writer is the author of several books on the City and Wall Street
Last weekend’s rescue of SVB UK was a win for HSBC and the City of London at a time when both needed it. Under pressure from Chinese insurer Ping An to split its Asian and western operations, HSBC used the confidence given by a balance sheet built up on one continent to underpin an acquisition in another. It’s not a definitive answer to calls for a break-up of HSBC, but it certainly helps.
The City has been under pressure of a different kind, losing market share to Wall Street and the European bourses and criticised for its failure to list and retain growth companies on the London Stock Exchange. The collapse of SVB UK, a specialist in funding start-up and scale-up companies, or its sale to an overseas bank with no locus in the UK, would have been a further blow.
Instead, HSBC, a London-listed, Asia-facing global bank, worked together at pace with Rothschild, an Anglo-French investment bank with an office a stone’s throw from the Bank of England, and the British authorities. Global, nimble and using the old economy to build up the new, it is how the City is meant to work and it did. But the bank that did the deal and the authorities that helped it to happen have more to do if they are to build on a good weekend’s work.
In a 72-hour period, HSBC, a bank not renowned for its fleetness of foot, swiftly assessed SVB UK’s £5.5bn loan book; weighed up the potential maturity mismatch between that and its £6.7bn deposits; and estimated — it could have been little more than that — the likely damage from its west coast parent’s problems to the London bank’s £1.4bn equity value. With a $3tn global balance sheet to absorb any damage, HSBC decided to take a punt.
What of the competition? HSBC knew that SVB UK’s importance to the government’s growth agenda gave domestic buyers the advantage. Although it makes most of its money in Asia, HSBC operates a regulated ringfenced bank in the UK and can play the home card whenever it chooses.
Bearing in mind that Lloyds and RBS, recent wards of the state, probably wouldn’t take the risk, it might have seemed that Barclays, a market leader in banking to growth companies and with Lehman-sized form in buying distressed assets, would be the likely rival.
But there was a surprising lack of interest from Barclays HQ. Farther along Canary Wharf, HSBC executives reckoned that they had the stage to itself. They bid a token £1, winning a good deal for their own shareholders and sparing SVB’s UK customers and employees massive disruption.
The City’s regulators and the UK government can also be pleased. The institutional architecture put in place after the global financial crisis of 2008 passed its first big test. In contrast to the muddled tripartite arrangements of the early 2000s, No 10, the Treasury and the Bank of England have clearly defined roles and worked together effectively. Ringfencing, detested by the industry but a prominent feature of the regulatory landscape since 2019, helped a tidy resolution in this case.
This was also the first banking crisis since the government’s financial services package of December 2022, known as the Edinburgh reforms. Among other things, these gave regulators a growth and international competitiveness objective. Mixing supervision and growth hasn’t worked in the past and might still lead to grief, but here the authorities had evidently been listening. In smoothing potential bumps in the road for HSBC, including removing certain ringfencing requirements, regulators helped to get this deal done. It won’t be a material factor in HSBC’s thoughts on whether to keep a London listing but the counterfactual certainly would have been. The authorities can therefore be satisfied with their work but now need to resist industry lobbying to lighten up further.
For HSBC, the hard work starts here, beginning with the intricate business of valuing the loan book. The turnround last weekend was so rapid that due diligence in Rothschild’s virtual data room cannot have been completely comprehensive. HSBC, a bank with a chequered deal history, will be hoping that its latest acquisition’s equity cushion is thick enough to absorb the results of some old-fashioned credit risk analysis.
Which brings us to the biggest risk in this acquisition, culture clash. SVB UK banks to 3,300 growth companies in sectors such as technology and the life sciences. Growth companies are optimistic, entrepreneurial and opportunistic; big company bankers are not. The faultline is not likely to be working from home, dressing down or free beer on Thursdays, but risk appetite.
Will HSBC be able to handle the high-risk, high-reward trade-offs implicit in banking for growth? How it manages this will be a challenge in retaining and motivating staff and clients, a challenge that you can be sure HSBC’s competitors, including Barclays, will be trying to exploit.