Must read: market reaction as HSBC rescues Silicon Valley Bank's UK arm

Our head of investment rounds up the morning's big news.

HSBC UK RESCUES SILICON VALLEY BANK UK WITH £1 ACQUISITION 

After a weekend of stressful negotiations in an attempt to put together a rescue deal for tech lender Silicon Valley Bank UK, HSBC Holdings (LSE:HSBA) has announced that it is acquiring SVB UK for £1, facilitated by the Bank of England and the government. The transaction will complete immediately and will be funded from existing resources.

According to Chancellor Jeremy Hunt, deposits will be protected with no taxpayer support. The Bank of England said no other UK banks are directly materially affected by these actions and the wider banking systems remains ‘safe, sound, and well capitalised.’

HSBC said a final calculation of the gain arising from the acquisition will be provide in due course. It said that on 10 March, SVB UK had loans of around £5.5 billion and deposits of around £6.7 billion.

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HSBC’s acquisition of SVB UK is a welcomed development for its depositors and the wider banking system. It means that SVB UK will avoid insolvency proceedings and its customers will be able to access deposits and banking services as normal from today. It will be interesting to see whether the start-up friendly style of lending offered by SVB and not the larger more traditional banking behemoths, will continue to be possible under the HSBC umbrella. 

EUROPEAN MARKETS 

After a mixed session in Asia, European markets have opened lower, with the FTSE MIB in Italy leading the declines, while the FTSE 100 is also under pressure, dashing hopes of a market rebound this morning. 

UBS Group AG (SIX:UBSG), Credit Suisse Group AG (SIX:CSGN), Commerzbank AG (XETRA:CBK), Banco Santander SA (LSE:BNC), Barclays (LSE:BARC) and Lloyds Banking Group (LSE:LLOY) are nursing losses in today’s session, with HSBC trading around the flatline, outperforming broader weakness. Despite HSBC’s rescue deal, investors are taking a cautious stance towards the banking sector compounded by the fact that this could slow the pace of central bank rate hikes, creating a headwind for banks’ net interest margins. 

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IMPLICATIONS FOR THE RATE HIKING CYCLE 

Last week, analysts were divided over the chances of a 25 or 50 basis point rate hike from the Federal Reserve at its next meeting this month. However, it looks like the 50 basis point move is very likely to be off the cards altogether given the negative economic impact and the effect on sentiment from the SVB fallout. The Fed could even potentially opt for no change to interest rates whatsoever as the central bank keeps a close eye on the risk of any contagion effects from SVB’s collapse. 

In the UK, interest rate futures are now pricing in a roughly 25% chance that the Bank of England does not raise rates at its March meeting in what could be a significant near-term change in policy direction. 

WHAT CAUSED SVB'S COLLAPSE?

The bank run was triggered after SVB crystallised a $1.8 billion loss on its $21 billion bond portfolio, spooking investors and customers. The tech sector lender took a view on interest rates last year and miscalculated the expected level of rate hikes from the Fed, landing the lender with heavy losses. On top of that, the rising cost of funding and volatile financial markets, which caused a dearth in IPOs, made life more difficult for many of SVB’s tech start-up customers, with some withdrawing deposits, putting pressure on SVB.

DEVELOPMENTS IN THE US 

In the US, regulators have approved plans to create a backstop for SVB depositors and financial institutions, providing them with access to their funds from today. Plus the Federal Reserve has announced an emergency lending facility to support US banks and reduce wider ramifications. This has helped to lift US futures after Wall Street closed sharply lower on Friday with the Nasdaq down over 1.75% and the Russell 2,000 down almost 3%.