Silicon Valley Bank

Debate between Lord Tunnicliffe and Lord Fox

Tuesday 14th March 2023 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, we recognise the indispensable role played by the UK life sciences and tech sectors. These drive growth and innovation across the economy, as well as creating and sustaining good jobs. We therefore welcome yesterday’s announcement that HSBC is buying the UK arm of Silicon Valley Bank.

As the Statement makes clear, this move protects SVB UK’s customers’ deposits, allowing them to bank as normal. That will allow a range of start-ups and scale-ups across the UK to continue their operations rather than having to deal with immediate financial and other pressures. We are grateful to officials at the Treasury, Bank of England and financial regulators for working at pace over the weekend to facilitate this agreement.

The collapse of SVB raises important questions about the risks taken by some financial institutions and their regulators. It is true that in the UK context the system established under the Banking Act 2009 has worked. However, my colleague Tulip Siddiq asked yesterday whether, at the time when SVB UK’s licence was granted, any assessment was made of the significant liquidity risks associated with SVB UK’s deposit base. I do not expect the Minister to answer that question today, but I should like an assurance that a review will be undertaken in due course or that Ministers will make themselves available to parliamentary committees for questioning.

Normal ring-fencing rules also had to be disapplied to allow HSBC’s acquisition. The Economic Secretary helpfully confirmed yesterday that this exemption will be permanent. Will the Minister go into more detail about any steps HSBC or SVB UK may be required to take in the future? If she is unable to do so today, perhaps she will write with further information prior to our debate on the “made affirmative” statutory instrument.

The Government are currently making significant changes to UK financial regulation. We support the broad thrust of this, as the financial services sector makes a significant contribution to the UK economy and its success will be key to future growth. However, as our many debates on the Financial Services and Markets Bill highlighted, we must balance risk and reward. Does the Minister have full confidence in all the regulatory changes proposed in that Bill and in the so-called Edinburgh reforms, which will come on stream later, or is it possible that the Treasury might wish to revisit some aspects of those initiatives in the light of recent events?

While the UK part of SVB’s collapse may have been addressed quickly, global markets have still been sliding as recent events are processed and questions are being asked about the risk level of similar institutions. Does the Minister agree that it is vital that we do everything possible to provide confidence in the UK’s financial system? With this in mind, and given the impacts of persistently high inflation and increasing interest rates on UK institutions, will the Government launch a systemic review of the risks facing the sector?

[Lord Fox (LD)]

My Lords, I thank the Minister for repeating the Statement, albeit in the graveyard shift: she could have got in a bit earlier. Having read through the details of the events of the last weekend, I can understand why the Statement veers towards the slightly triumphalist: the sale of Silicon Valley Bank to HSBC averted existential problems for a huge number of UK tech businesses, and I am sure the Minister and colleagues are pleased to have done this. We should congratulate the Treasury and the Bank of England, as well as Coadec, Tech London Advocates and BVCA on the industry side, all of which came together very swiftly over the weekend. But where do we go from here?

First, can the Minister confirm that there will be a full investigation, both to confirm how this happened and, more importantly, what lessons can be drawn? One lesson we can all observe is that bank runs in the social media age happen in hours rather than days: the speed with which the run on this bank happened points, I think, to future issues if we ever came to them. As we know, Silicon Valley Bank’s UK wing oversaw roughly £7 billion in deposits from 3,000 entities across the country’s important tech industries and, contrary to US reports, it was not ring-fenced from its US parent. My first specific question is how we ended up in a situation where a huge proportion of a vital sector of the UK economy was reliant on one regional US bank. I am sure the answer is not simple, but it is important. For example, accessing connections to venture capital may have led banks to SVB, but there is also evidence that the traditional UK banks just do not have the appetite to take up this kind of business. Where will the tech start-ups go now for funding, especially in an environment where capital is getting more scarce?

History tells us that, when interest rates rise as fast and by so much as they have during the past period, bad things nearly always happen. It is a near certainty that one of two outcomes will occur: recession or a bank crash—sometimes both. I am sure we all hope that the failure of SVB, the closure of Signature Bank and the Tory-created crisis in UK government bonds and the pension sector are just outliers and do not herald something worse. They may, indeed, be one-offs; however, it seems to me that the Government, the Treasury and the Bank of England have to err on the side of caution. Can the Minister assure us that the tone of this announcement does not indicate a sense in our financial institutions that their work is done?

The SVB crash epitomises the risks buried in our financial system as central banks rapidly lifted borrowing costs. SVB’s unhedged investments in long-term, fixed-rate, government-backed debt securities left it doubly exposed to rising interest rates because it reversed tech companies’ growth and hit the price of its securities. There may be other issues that unwind when investigation of this bank carries on—we will have to wait and see—but how did the US regulators miss the issue at the heart of SVB? Since the 2008 financial crisis, the focus has been on liquidity, although I would suggest that not even that has been particularly successful. Interest rates have grabbed little attention because they had not posed a significant threat in recent decades, but they do now.

Can the Minister confirm that the Government have asked the Bank of England to review the stress tests it conducts in order to take into consideration the rapid rise in interest rates? Can the Minister confirm that the tests will be extended into the so-called shadow banking sector, which is increasingly grabbing large slices of business traditionally carried out by banks? Can the Minister also assure your Lordships’ House that the necessary horizon scanning is under way?

I do not think anyone predicted the LDI issue in the autumn, and I do not think anyone pointed to a sector-focused regional bank like SVB being the source of a crisis. So where could the next crisis come from? I can offer three options in the current environment: insurance funds investing in illiquid assets; overvalued real estate; and private equity funds with opaque valuations. I am sure the big brains in the Treasury will be much better at navigating the complex and interwoven investment landscape and come up with a better list to enable them to avoid unpleasant surprises. Can the Minister confirm that there are people digging down into the systemic risks which are buried deep inside the highly complex finance systems and finance products that exist around the world today?

At the heart of this is also politics. Republicans have loosened US bank regulations in recent years and banks such as SVB had previously lobbied successfully to be excluded from the category of systemically important banks—that meant they faced lower capital and liquidity standards. We are not immune from the same political pressures in this country. The Edinburgh reforms announced late last year also point towards deregulation, not least in the plan to reform the ring-fencing regime for banks.

But more than that, and as the noble Lord, Lord Tunnicliffe, referred to, we can see this trend in the Financial Services and Markets Bill that is currently being debated by your Lordships. For example, Clause 24 in that Bill requires the FCA to help drive the international competitiveness of the economy of the United Kingdom, in particular the financial services sector—help drive the competitiveness of the economy. This creates a huge conflict of interest within the FCA, and in light of the SVB it looks at least questionable. Can the Minister confirm that this clause will be reviewed with a view to future amendment when the Bill comes back on Report?

Finally, after 2008 the Government and the financial sector all said “Never again”, and there were significant changes to the banking regulations; much of this was based on a report led by Sir John Vickers. Speaking today on the BBC, Sir John said that the country made advances in 2009 and we must not row back on these advances. He explicitly said that the Edinburgh reforms should be reviewed again and that ring-fencing should be maintained. I would remind the Minister that, failing anything better, the Government are the scrutiniser in chief, and the buck stops with the Government. Will the Minister listen to Sir John and halt the slide towards deregulation in this country?

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, as noble Lords have recognised, the course of events over the weekend was a good outcome for the customers of Silicon Valley Bank in the UK and an example of the Bank of England, in consultation with the Treasury, using powers granted by the Banking Act 2009, as part of the post-crisis reforms, to safely manage the failure of a bank and, in this case, facilitate its sale, which has protected those customers and taxpayers. I add my thanks to both noble Lords’ to the officials in the Treasury and at the regulators who worked tirelessly through the weekend to grip the situation and prevent real jeopardy to hundreds of the UK’s most innovative companies.

The noble Lord, Lord Tunnicliffe, asked whether any assessment was made of the significant liquidity risks associated with SVB UK’s deposit base at the time its licence was granted. Those authorisation decisions are for the independent regulators to comment on. However, requiring SVB to subsidiarise meant that it was independently capitalised from its parent in the US and had its own liquidity buffers. That brought the firm into the scope of the UK’s resolution regime. Had SVB UK remained a branch, it would have been resolved by the US resolution authority as part of action taken with respect to SVB.

That distinction is important to make in relation to a few of the points from the noble Lord, Lord Fox, in looking at the potential differences between the regulation and the regime in the US and the regime in the UK. However, there is read-across between the two. That is why we have measures in place to ensure that banks that are of systemic risk to different jurisdictions have cross-jurisdiction oversight, and that regulators work together on these matters.

The noble Lord, Lord Tunnicliffe, also asked about the ring-fencing changes made to facilitate the sale. To ensure the sale could proceed, the Government used powers under the Banking Act to provide HSBC with an exemption to certain ring-fencing requirements. This was crucial to ensure that a successful transaction could be executed, that the bank had the liquidity it needs, and that deposits and public funds were protected. We broadened an existing exception in the ring-fencing regime, allowing HSBC’s ring-fenced bank to provide intragroup lending to SVB UK. This should facilitate the smooth operation of SVB UK. In addition, SVB UK, which is now a subsidiary of HSBC’s ring-fenced bank, is not subject to the ring-fencing rules.

Both noble Lords spoke about the importance of doing everything possible to ensure that there is confidence in the UK’s financial system. We absolutely agree with the importance of that, which is why the UK authorities took such swift and decisive action this weekend to facilitate the sale of the firm. The noble Lord, Lord Fox, noted how quickly events unfolded. It is certainly true that the timeline including the weekend gave the time and space for such a resolution to be found, but that only adds to the point about the speed at which these events can take place.

Both noble Lords also asked about the stress test system for banks and about launching a wider systemic review of the risks facing the financial sector, including non-bank risks. Of course, both noble Lords will know that that is the role of the Financial Policy Committee of the Bank of England, which is responsible for identifying, monitoring and addressing systemic risks to financial stability.

The FPC meets quarterly, following which a record of its discussions is published. It produces a biannual financial stability report setting out its assessment of the risks facing the financial system and its resilience. It looks at it for the non-banking sector, but also sets the scenarios and coverage used for stress tests within the banking sector. Those decisions remain with the Financial Policy Committee.

Both noble Lords also rightly pointed out that, while we reached a good resolution in this instance, it is of course right that we reflect on what happened and look at whether any lessons can be learned. I can confirm that the Treasury and the Bank of England are looking to work together to ensure that we reflect properly on the events in this case.

Finally, both noble Lords also referenced the reforms that we are currently taking through this House in the Financial Services and Markets Bill and through the wider Edinburgh reforms set out by the Chancellor in December. I assure all noble Lords that the Financial Services and Markets Bill introduces ambitious reforms for a financial services sector that will give the UK the ability to continue to grow and be internationally competitive with other markets, while adhering to the highest-quality regulatory standards. As my honourable friend the Economic Secretary to the Treasury said to the House of Commons yesterday, having good, healthy businesses that grow and are profitable is the best way to avoid jeopardy. The Bill and the Edinburgh reforms deliver that commitment. We are confident that our reforms will deliver a high-quality regulatory environment for our financial services sector in future.

[Lord Tunnicliffe (Lab)]

I know it is unconventional, but will the Minister advise us whether the lessons learned report is going to be published?

[Lord Fox (LD)]

The Minister is getting a job lot of questions. I was hoping to hear her say that the shift in danger has gone from being just about liquidity to being about a lot of things connected with interest rates. We saw that in the autumn and again this week. When I suggested that the Treasury talk to the Bank of England about stress tests, I was suggesting not that the Treasury did the stress testing but that we would all be much more comfortable if we knew that shift had been taken on board and would inculcate future stress tests.

Space Industry Bill [HL]

Debate between Lord Tunnicliffe and Lord Fox

Report stage (Hansard): House of Lords
Tuesday 14th November 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I shall speak also to the other amendments in this group.

I have read my speech in Committee, which was very good and persuasive. The trouble is that it was also unsuccessful and so, as a student of the Companion, I will not repeat it. However, I would like to say a final word or two on safety. I thank the Minister for the time she and her predecessor spent with us discussing this matter and for the letter she sent us on two points, to which I will come later.

NASA has been in the space business since I was a boy—and that was a long time ago. I have had a brief look at its website and, as far as I can see, it spends £2.9 billion a year on safety and security. However, despite its efforts, it has regularly killed people. The early rocket-powered flight experiments had fatalities; it is often forgotten that the moon programme killed three astronauts on the ground when there was a fire in the capsule; the shuttle programme managed only 135 missions, two crashed catastrophically and 14 people died. That was probably as well as could be done with all that effort, but we are asking the CAA and/or the United Kingdom Space Agency to tackle the same task. I am afraid that I am somewhat pessimistic about what the result will be in the early stages of any UK space programme. I hope in developing the skills they will need that they will spend a lot of time with our American cousins, in particular, stealing as much knowledge as is possible.

As I said earlier, I thank the Minister for the time she found for us. She was kind enough to send us a letter giving assurances about the role of the HSE and single point accountability with respect to safety. I will not repeat the letter because I am assured she is happy to read those assurances into her response. With that, I beg to move.

[Lord Fox (LD)]

My Lords, names of Members from our Benches are not attached to these amendments, but we would like to associate ourselves with all four of them. I want to say a few words about safety because it is obviously not in the industry’s interest to operate unsafely; in fact, quite the opposite. It would be a way of hastening its end. So it is not that the industry will set out to operate in a cavalier manner, and that is not what these amendments imply. From my experience of working in industries that have an inherent risk but are not necessarily as risky as the space industry, the greater prominence that safety is given in their operations at every level right up to senior management and in terms of the supervision of organisations, the more likely it is that they will be inherently safe. You can rely on processes and people on the ground to operate safely because of course it is in their interests to do so, but it is always more successful when safety is elevated to the highest possible level. It is with that in mind that we support these amendments.

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[Lord Tunnicliffe]

My Lords, I support the general spirit and direction of the amendment. The task that the CAA and the space agency will face will be very difficult. I hope that the Government will be able to give us further assurances that resources will be made available to power this learning curve. I hope that there will be enough time for the skills to be in place before real applications come before the regulator. It is easy to underestimate just how difficult this task will be for the CAA and the space agency.

[Lord Fox]

The nature of this work, certainly in the early stages, could be quite lumpy. In earlier discussions —at Second Reading, I think—the Minister talked about perhaps only 12 launches a year. There could be moments of great intensity of activity followed by no activity and therefore no income. How will the regulator maintain this level of expertise through what could be feast and famine during that process?

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[Lord Fox]

My Lords, I am afraid that this is Groundhog Day all over again. We have discussed these issues and I will not go into the economics, save to say that there is huge potential for very high insurance costs for multi-satellite constellation launches. In Committee, the Minister said that work was in hand and would be finalised within 12 months of the Bill receiving Royal Assent, so the amendment was not necessary. I feel that it is necessary because this is the make or break economically of the nano-constellation-style satellite. Without resolution of this issue, there will be no industry in this regard because it will be too expensive to launch these satellites in this country. For that reason, while the work is in hand—and I accept in good faith that it will be completed—we believe that the amendment should be agreed. I beg to move.

[Lord Tunnicliffe]

My Lords, we support the general thrust of this proposal and hope that the Minister will say sufficiently warm words so that the amendment will not be pressed. I hope that she will be driven by the simple fact that the industry almost certainly will not get off the ground unless the Government can produce some assurance that appropriate legislation will be brought forward at some stage to enable small satellites to be economically effective.

Space Industry Bill [HL]

Debate between Lord Tunnicliffe and Lord Fox

Committee: 2nd sitting (Hansard): House of Lords
Wednesday 18th October 2017 Lords Chamber

[Lord Fox]

My Lords, in moving Amendment 38, we seek to insert a new clause after Clause 37 which sets up a consultation on the licensing and insurance of small satellites, including what we call nano satellites, which I will speak to in a moment.

As was alluded to in our previous sitting, when my noble friend Lord McNally spoke about having the right level of liability and governance over these exercises, we seek to set up a process that recognises the varying risks according to the payload to be launched from these facilities. We want to reflect the relatively reduced risk posed by smaller micro-launchers and what are called nano-sat payloads, because both of these are growth industries which would be extremely valuable to the United Kingdom and could be a niche opportunity for such facilities, if they are to be successful. It is essential that the licensing, insurance and range-tracking costs are appropriate to the level of risk to payloads to allow the industry to succeed. We have already discussed how a burdensome regulatory requirement could negatively impact while, at the same time, in a series of amendments and new clauses, we have tried to maintain the right level of oversight.

In particular, a regulatory barrier exists around launch licensing for mega constellations. The current British law treats the nano satellite constellations no differently from large, $200 million satellites that go into geostationary orbit. Each satellite on a constellation is subject to the same licensing fee and must carry third- party insurance coverage of up to €60 million per satellite. Clearly, if there is an array of 750 satellites, it makes the whole affair expensive to insure, and it flies in the face of practice in other regimes, as I understand it.

The amendment would require the Government to consult on the desirability of changing how these small and nano satellites are insured and licensed, to ensure that it would be most beneficial to the industry while at the same time maintaining sufficient cover to be safe. I beg to move.

[Lord Tunnicliffe]

My Lords, this is an interesting point. I hope that the Minister will take it away and give it some consideration. I think we all agree that the whole issue of liability and insurance is important to get right so that the industry does not fail due to crippling cost.

Space Industry Bill [HL]

Debate between Lord Tunnicliffe and Lord Fox

Committee: 1st sitting (Hansard): House of Lords
Monday 16th October 2017 Lords Chamber

[Lord Tunnicliffe]

My Lords, I said that the previous group of amendments was probing. We had had time with the Minister to try to understand the Bill but unfortunately we did not get as far as this area. Therefore, I will not attempt to explain the amendments in this group because I do not really understand the parts of the Bill that they relate to. With that admission, perhaps I may simply put a few questions to the Minister.

I think I understand that there is the concept of strict liability towards an uninvolved third party who suffers a loss. I would be grateful if the noble Lord could confirm that—we are moving forward question by question—obviously with the necessary caveats and niceties. As I understand it, the amount of liability may be capped. To me, that means that there is a limit on how much the operator—or the Government, who might be liable—must pay in damages to an uninvolved third party in the event of an accident. I hope that I have that bit right. However, I am not clear about who pays if the losses exceed the cap. Clearly, it is not the operator—that is what a cap means. Therefore, is it the injured third party?

It is very rewarding working in the safety sector, although it means that you get a bit ridiculed. However, we are talking about a TriStar with a bomb on it crashing in the middle of Glasgow. That is not an impossible scenario. Of course, it is not very likely but the unlikely happens—that is what the statistics show. Who would meet the costs of such a catastrophe? Even if there is no cap on the operator’s liability, the commercial structure of the company means that there will be a de facto cap because the company will rapidly go out of business without one or if it is uninsured. However, there will be circumstances in which the amount exceeds the cap.

Elsewhere in the Bill, the Government seem to have the ability to meet the obligations towards the injured third party. So if the answer to my question is that the Government will meet the excess over the cap, which part of the Bill provides for that? Is it an assurance to the uninvolved in society—us and the people around Prestwick—that where there is an event, their damages will be met either by the operator or by the Government? Who will meet the excess over the cap, or is society in general exposed above the cap? I beg to move.

[Lord Fox]

My Lords, I apologise to the noble Lord, Lord Tunnicliffe, for missing the first couple of words of his contribution and to the Committee for being slightly detained outside the Chamber.

Very briefly, the mission of these amendments, in the event that they were adopted by the Government, appears to be to create unlimited liability for the companies concerned in the pursuit of their business. Having asked a few questions of such operators, my understanding is that were they in an environment of that nature, the whole spirit of the Bill would be lost very quickly, in that no operator would undertake a risk of that level. I understand the concerns of the mover of this amendment, and the questions he has asked of the Government—who would pick up the liability?—are the right ones. However, the solution of creating unlimited liability across the board for the operator is not one that these Benches would support.