Spring has sprung and is finally with us. The spirit of the season is (largely) already evident. In so very many ways, matters seem much brighter than they did six months ago.
As recently as late November we were being told that the economy was about to sink into the deepest and longest recession since the 1930s (and possibly the Black Death), that a second Russian assault in Ukraine, more dastardly and deadly than the initial incursion, was imminent and that partly as a consequence, energy prices witnessed at home would reach a level that made the return of candlelight an appealing option.
Energy bills have indeed been high but are set to tumble as the market returns towards normality.
It turns out that the case for the end of the civilised world might (as the FD Blog said at the time) be somewhat overstated. The Office for Budget Responsibility (OBR) now thinks (as of March 15th) that the UK economy might only contract by a mere 0.2% of GDP (or around the combined wage bills of Manchester City and Manchester United) in 2023 before staging a recovery thereafter. It transpires that there are still people going out to pubs and restaurants and not merely for shelter (although the OBR is seeking explicit CCTV evidence of this before allowing any excitement to run riot). Meanwhile, it seems that the only effective army that Vladimir Putin has at his disposal is his own body doubles. Energy bills have indeed been high but are set to tumble as the market returns towards normality. Many an FD is entitled to feel rather more content today than in the dark second half of last year.
Admittedly, not everything is moving in the right direction. The search for fresh vegetables on the shelves of many a supermarket has come to resemble an episode of the (revived) Challenge Anneka, North Korea is still threatening anyone who might listen with the prospect of nuclear Armageddon (with its leader conducting an unusual turn on “take your daughter to work day”) and the British weather has not yet recognised that it is supposed to make more of an effort to perk up as well. Yet these inconveniences are hardly of a scale to make a hardy Finance Director contemplate the life of a hermit. This is not destined to be the most comfortable year that those at the helm of companies across regions and sectors across the land have ever experienced but for most it will be manageable.
So, it is all coming up roses again then. Apart from, that is, parts of the international banking system.
It used to be the case that an FD would fret about whether or not their bank would consider their company to be solvent. It appears as if this relationship has changed somewhat in character. It may fall to the FD to insist on proof that their institution could be relied on to come up with the money if the business wanted it from them!
There is a rather surreal irony to this (hopefully limited) crisis within the financial system. It used to be the case that an FD would fret about whether or not their bank would consider their company to be solvent. It appears as if this relationship has changed somewhat in character. It may fall to the FD to insist on proof that their institution could be relied on to come up with the money if the business wanted it from them! That the proverbial boot is on the other foot is the cause for a wry smile, but it is also concerning.
The operation put together to save the UK end of Silicon Valley Bank was, it should be said, assuring and impressive. Ministers and officials alike demonstrated an awareness of the importance of SVB UK to a crucial section of the start-up and technology community and avoided a disaster. It remains, though, in many senses a tragedy, in that SVB UK was a pioneer and widely admired by customers.
It would be a stretch to say the same of the SVB mothership back in California. As SVB US was much bigger than SVB UK (which had been immune from the sins of its parent), this was more complicated than selling it to HSBC for £1.
The somewhat exceptional nature of SVB – narrowly focused as it was on one very important area of the economy for its client base – meant that its demise could be considered a fluke, even as a freak one-of-a-kind with little in the way of wider implications for the banking system more broadly. This was indeed the line that those involved with this stream of financial services instantly offered once the sheer shock of what occurred at SVB had reverberated across the international economy.
Those with long memories would have been instantly suspicious about that assertion. It was almost exactly the same argument made when Northern Rock went south in the UK in 2007 (namely that it had a unique method of funding its mortgage arrangements which had led it into difficulties). A year later, virtually the whole of the UK banking system had to be bailed out at the behest of taxpayers.
The sense that SVB might not be “one-of-a kind” was reinforced when, first, the relatively obscure Signature Bank in the US hit the skids and was repeated in spades when Credit Suisse (not remotely similar to SVB or Signature) had to be swallowed by UBS with the Swiss Government doing the fixing.
One would not need to be the FD of a vast international enterprise to ask: “what is happening?”. The FD of Walsall Widgets is equally entitled to the same enquiry. That the Bank of England is asserting that the UK banking system is solid and sound might calm nerves (and looks to be credible) but the predictive record of those in Threadneedle Street in minor matters such as the state of the economy has hardly been so stellar that a FD can sleep safely without putting the money under the mattress.
Does that mean Spring has been deflated only days after the daffodils have made an appearance? Probably not. Indeed, if this saga makes the central banks more cautious about interest rates it could even prove a blessing in disguise. The SVB episode, especially, illustrates that in the real world, there are few banks which are not “too big to fail”. FDs should be able to focus on their fundamentals. Whether those involved in some (not all) banks can resist repeating past mistakes is another matter entirely. More sunlight aimed in their direction would be very welcome not just in Spring, but all year round.
