Draft Silicon Valley Bank UK Limited Compensation Scheme Order 2024

Kit Malthouse Excerpts

Monday 20th January 2025 General Committees

[Kit Malthouse (North West Hampshire) (Con)]

I have no wish to detain the Committee, but I do have some questions about the particular process we are discussing, not least because, as I understand it, it was the first time that the Bank of England had used its resolution powers as they currently stand. What happened has wider implications that we need to think about for the health of financial services in the City of London.

My first question is this: could the Minister confirm that there is no litigation outstanding either in the UK, or contemplated in the UK or in the United States, that this measure seeks to obviate? If that is the case, will she elaborate a little more about the decision making of the Bank of England during the process? Although she outlined what happened at a very high level, she did not fill in all the detail. For example, as I understand it, Silicon Valley Bank UK Ltd, the subsidiary, was a perfectly solvent banking entity within the UK. It applied for £1.8 billion of liquidity funding to the Bank of England when its parent was getting into trouble. A decision was made by the Bank of England at that point to deny funding to that bank. Has there been any review of that decision? Is the Treasury aware of why the funding was not made available? What assessment was made by the Bank? In future, if other banks apply for similar liquidity funding when overseas parents are in distress, what criteria will be applied so that everybody knows exactly what they are doing?

The Bank then initially made a decision to put SVB UK into an insolvency procedure—it did not immediately go for resolution—and in that insolvency procedure, obviously depositors were due to get their £85,000 as guaranteed, or £170,000 for joint accounts. But something changed over the weekend, because by the Monday, the Bank had changed its tune and was going for what has now resulted, which is the sale to HSBC for nothing. Do we know why it made that initial decision? My guess is that it changed its mind because the depositors went nuts. Lots of tech start-ups had large deposits with that SVB UK, and much of it had been money raised from shareholders. There was obviously quite a lot of political intervention, but what were the influences on the Bank’s decision making? If it changed its mind because the Treasury, the PRA or the FCA said that it should change its mind, why was its initial decision therefore deficient? What does that say about the Bank of England’s decision making?

Finally, given that that was the first time that those powers were used, I wonder whether there has been a review by the Treasury—as one might expect in such a petri dish experiment situation with such a valuable industry—as to whether what happened was overall beneficial both to the UK economy and to financial services. The Minister will understand that financial services are extremely valuable to this country and that anything that creates a sense of instability will detract from the attraction of the UK for financial services. The structure of Silicon Valley Bank, specifically—that it had a subsidiary in the UK, rather than a branch—was meant to promote the sense of stability and independence of regulation that would, in theory, have allowed it to trade independently.

All those questions need to be asked. If there has not been a review, I would be grateful if the Minister, given that she is new to the job, might acquaint herself with the issues in a little more detail and satisfy herself that this measure is not a negative for overseas banks establishing branches here, because since this situation, I cannot see —I have had a look, although I may have missed it—that any overseas bank has done so. If they have not, is this why?

[Emma Reynolds]

I thank the shadow Minister, the hon. Member for Wyre Forest, for his kind words—we will be spending a lot of time together this week. I also thank him for what he said about shareholders and the principle of risk and return. We know that there is a correlation between the risk taken and the return due, but that does not always work out. Proportionate regulation encourages considered risk-taking, which we are in favour of; we want to see entrepreneurship in our economy. Maybe this is a more philosophical debate that we could have on another occasion, but I agree with a lot of what he said about shareholders providing scrutiny. We certainly should not criticise them for being shareholders, because we need good shareholders for the functioning of the economy.

Let me turn to the remarks of the right hon. Member for North West Hampshire and attempt to answer all of his questions. Obviously, I was not in the Treasury that weekend—one of his colleagues was—so if he wants a very detailed description of those events, he probably should speak to the shadow Business Secretary, the hon. Member for Arundel and South Downs (Andrew Griffith). That is my first recommendation.

Secondly, there is certainly no litigation in this case. It is for the Bank of England, as the independent regulator, to weigh up and balance the different trade-offs involved in this sort of decision making. I cannot speak for the Bank of England, but I point out to him that only 14% of deposits would have been covered by the financial services compensation scheme. He might think that that would have been a better eventuality.

[Kit Malthouse]

That is not what I am implying at all. In this instance, I think that resolution was the right thing to do. What I am saying is that the Bank of England’s first decision, on the Friday, was to go for an insolvency and only pay out 14% of the deposits. It was only after pressure was brought to bear on a supposedly independent bank over the weekend that the strategy was changed to a resolution and the bank was transferred to HSBC. In fact, the Bank of England issued a press release to the effect that it was putting the bank into the insolvency procedure, and then over the weekend changed its mind. I am asking about the integrity and quality of the Bank of England’s decision-making procedure, given that it initially proposed to do exactly what the Minister says should not have happened.

[Emma Reynolds]

I cannot speak for the independent Bank of England, so I gently suggest to the right hon. Gentleman that if he has questions or concerns about the timing of the issuing of a press release on the Friday in March 2023, he should convey them to the Bank of England.

I will take up the right hon. Gentleman’s recommendation to look into the issue more closely, but I also gently say to him that—due to the work of officials in the PRA, the Bank of England and indeed the Treasury—overall we had a good outcome, because by the Monday morning, before the markets opened, we had a smooth transfer from SVB UK into HSBC. My point is that in the end depositors were in a much better position on the Monday morning than they had been on the Friday; regardless of the choreography, we got to the right outcome in the end.

I think that there has been consideration of the resolution process, although not necessarily of the timing of the events mentioned by the right hon. Gentleman. Indeed, on Wednesday, myself, the shadow Minister—the hon. Member for Wyre Forest—and other hon. Members here present will debate the Bank Resolution (Recapitalisation) Bill on Second Reading. That Bill has already been through the Lords. It seeks to ensure that in cases such as this one, we are protecting taxpayers. Indeed, what was good about this case was that SVB UK was in a relatively good economic position, but I could envisage a situation where that was not the case, and we will discuss such issues on Wednesday.

I commend the order to the Committee.

Question put and agreed to.