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No crisis, no action. The eleventh hour rescue of Silicon Valley Bank’s UK subsidiary last year has finally prompted the UK government to address a crucial gap in bank protection.
On Thursday, HM Treasury launched a consultation on how to clean up small, specialised banks should they fail. A coherent plan is needed — though big banks may grumble at the cost.
In March last year, SVB UK was hit by a liquidity crisis after its US parent was shut down by US authorities. It was eventually acquired by HSBC for £1.
The Treasury wants a clearer plan in place for institutions like SVB UK that lack the minimum capital buffers designed to protect the banking system — known as MREL. UK banks in the MREL system not only put aside added capital but also pay a levy to cover a depositor compensation scheme.
This means banks, not taxpayers, cover costs if banks fail. The Treasury wants this to be the case for small banks that get into trouble too. Who pays for this added protection is a fair question. The consultation suggests all banks chip in. But reducing the bank levy was supposed to be a priority for the government. Big banks such as Barclays and Lloyds are unlikely to be happy.
Investors in buy-to-let specialist Paragon will be more cheerful. Although the consultation does not cover challenger banks such as Metro, OSB and Virgin Money, it does affect Paragon. Paragon falls outside the MREL scheme, a fact that seems to have been noted by the hedge fund community. Paragon’s share price fell throughout last year. By November, the number of Paragon shares sold short topped a relatively high 10 days of average trading, according to Bloomberg data.
In December, traders quickly covered their positions for two reasons. The threat of higher for longer inflation subsided and Paragon reported better than expected full year results. Its share price has leapt 46 per cent since the end of November. That puts the stock on a price to tangible book of 1.2 times, above local peers.
The mood swing is notable. If Paragon’s 20 per cent return on tangible equity seemed too good to be true a few months ago, investors have no such concerns today. Rival OSB, which had a punishing few months after a profit warning in July, had a similarly strong reversal.
The SVB crisis should produce a useful rescue contingency plan for uncovered specialist banks. Large lenders’ fears of much bigger payments to the UK’s deposit guarantee scheme have been averted. Investors, and depositors, should welcome both outcomes.
*This note has been amended to refer to Paragon’s full year, not third-quarter, results.
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