Potential for SVB Contagion Among UK Banks

Many UK companies were exposed to the collapsed bank, but fears have at least receded for UK depositors and investors as HSBC just agreed to buy SVBUK with the BOE. Does this change expectations for UK banks?

Stopping the Bank Run

The collapse of the Silicon Valley Bank (SVB) is still ongoing, so the exact details of the cause are yet to be known. Therefore, it can't be definitively ruled out that UK banks might face a similar situation as HSBC just bought out UK assets. Details aside, the main issue that led the bank to be unable to provide funds to its clients is a global phenomenon, though UK banks are likely to be in a much better position.

In synthesis, SVB kept US treasuries (and other securities, but the bonds are the main issue here) as liquid assets to back client deposits. Interest rates increased considerably over the last several months, meaning the bonds lost value. If too many depositors withdraw their funds, then the bank would have to sell those bonds at a loss. With too many losses, the bank gets laid up. The Fed stepped in late Sunday to announce that it would guarantee depositor funds in all banks, which is expected to minimise contagion worries among other major banks.

Can that Happen in the UK?

UK banks keep British Treasuries as reserve, not US Treasuries, which means they are subject to the interest rate fluctuations of the BOE. And the BOE has not been nearly as aggressive as the Fed in hiking, meaning that UK banks shouldn't be facing similar levels of unrealised assets. 

The UK has already faced a similar situation last September, in the middle of the "mini-budget" fiasco in which long-term yields rose, potentially putting pension firms at risk of margin calls. The BOE stepped in to buy up bonds and stabilised the market. Since then, UK financial institutions have had several months to reorganise their financial holdings. Banks are, naturally, loath to disclose their unrealised losses, making it hard to gauge the total exposure of any given bank at any given time (which is one of the reasons that SVB's collapse caught everyone by surprise). 

Many analysts pointed to the SVB situation as a parallel to the Bear Stearns collapse in 2007. JPMorgan bought out Bear Stearns, and the markets calmed afterwards. However, the weakness in Bear Stearns was systemic, and the subprime crisis continued to develop, with the stock market crash later in the year. While the moves taken by the Fed and UK regulators help reduce the immediate risk of contagion and a collapse in the market, over the coming weeks and months, more details of just exactly what happened will emerge, and another market decline cannot be ruled out.

Lloyds Least Exposed

Lloyds banks, focusing on retail, may stand to lose less from a potential contagion or fear thereof. The stock has been in an uptrend since September 2020 and ended a pennant pattern in October of last year.

The short-term price action suggests the stock might be putting in another flag or pennant pattern. Sliding under 44.65, however, will increase the risk of further declines to 43.65 and perhaps the low of 38.40. Conversely, regaining control of 51.60 might enact a bullish spiral to 55.30 and fresh 2023 highs.

Source: Spreadex / Lloyds Banking Group

Key Takeaways

The collapse of SVB has raised fears of contagion among UK banks. While the exact details of the cause of the collapse are yet to be known, UK banks are in a better position as they keep British treasuries as reserves, and the BOE has not been as aggressive as the Fed in hiking. Lloyds bank may stand to lose less from a potential contagion due to their focus on retail, and short-term price action suggests that the stock might be putting in another flag or pennant pattern.