Why UK Took a Different Approach Than US on SVB Intervention
British policymakers have a stronger aversion to the twin risks of moral hazard and co-option of monetary policy by financial markets.
(Bloomberg Opinion) -- The UK authorities had little choice but to follow their US counterparts by making whole all those holding deposits at the British arm of Silicon Valley Bank. The way they did so, centered on what economists label a “private sector solution,” highlights not just the less complicated operational conditions faced by UK policymakers but also, and more interestingly, their stronger aversion to the twin risks of moral hazard and co-option of monetary policy by financial markets.
At 7 a.m. Monday, the UK Treasury and Bank of England announced that they had “facilitated” the sale of SVB UK to HSBC, a much larger bank, in a manner that protects all depositors and gives them immediate and full access to their funds. This came as a huge relief to small tech startups in particular that, like their brethren in the US, had a significant part of their banking activities at a lender widely seen as especially sympathetic to their operations.
The approach taken in the UK is different from the one in the US. Specifically, the authorities there opted for a no-limit guarantee to SVB depositors, setting aside the official mechanism that insures deposits up to $250,000. In parallel with this, the Federal Reserve opened a special window for all banks to provide cash for one year at preferential terms in exchange for certain high-quality assets.
One way to explain this difference is by looking at the significantly smaller size of SVB UK. After all, it is inherently easier to find a buyer for a small institution. It also means that an already big bank, such as HSBC, does not become appreciably bigger.
Having said that, there is more in play. The UK authorities, and the Bank of England in particular, have repeatedly appeared in the recent past to be more hesitant than their US counterparts when it comes to offering widespread guarantees, opening yearlong funding windows and allowing monetary policy to become hostage to financial stability drivers. This may well be the case again.
Remember what happened in the UK a few months ago amid the financial turmoil triggered by the “mini-budget” of former Prime Minister Liz Truss? Yes, the Bank of England felt compelled to intervene to provide assistance to troubled liability-driven investment entities but did so with a clearly communicated timeline and limits. When evidence emerged that the troubled institutions were not working hard enough to get their houses in order, Governor Andrew Bailey made a dramatic statement on a Tuesday night to remind them that the bank’s support would indeed stop the coming Friday as originally announced.
The Bank of England has been concerned that more open-ended support, especially if it is generalized, risks encouraging excessive risk-taking. It has also been careful to minimize the risk of monetary policy being hijacked by financial stability considerations — an approach that most economists would commend, especially when inflation is still a problem.
On the other side of the Atlantic, the Fed seems to have been less worried about having its monetary policy co-opted by financial markets as it sought to calm volatility. This has been evident in several small ways in the last few years, including in 2018-19 and again in 2020-21. Markets are now making it obvious in a big way by taking the probability of a 50-basis-point interest rate increase by the Fed next week from two-thirds to zero. In fact, the markets are not even favoring a lower 25-basis-point increase. Rather, the pricing of no hikes is being accompanied by a much lower peak rate for this cycle.
This is an amplification of the tricky trilemma facing the Fed. Having mischaracterized inflation as transitory for too long and then being too timid in its initial response, it has seen the policy path narrow to delivering low inflation, minimizing the damage to jobs and growth, and maintaining financial stability.
As I noted over the weekend, there was no perfect response to the SVB crisis. Difficult choices had to be made under extremely tight deadlines. Facing a less difficult operating environment, but also reflecting different policy biases, the Bank of England appears to have made better choices for the longer term.
More From Bloomberg Opinion:
- SVB Clients Forgot Bank Failures Are Common: Marc Rubinstein
- A Full Banking Crisis? Not in the SVB Wreckage: Paul J. Davies
- SVB Backstop Revives the Specter of Moral Hazard: Chris Hughes
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. A former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management. He is author of “The Only Game in Town.”
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