HSBC's Acquisition of SVB UK: The White Knight Operation

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HSBC's acquisition of SVB's UK bank for £1 is commonly known in investment banking jargon as a "White Knight" operation. This type of operation involves a rescuer, often a financially sound company, coming to the aid of a distressed company that is under a hostile takeover bid. In such cases, the regulator or market regulator (in this case, the Bank of England) typically supports and encourages the operation. This support sends a message to the market that the regulator is behind the operation both in terms of funding and psychological support. The bank's borrowers and depositors are also reassured that they have the regulator's backing, which further strengthens the psychological support.

The most recent examples of this type of operation are ING's acquisition of Barings Bank in 1995 and JPM's acquisition of Bear Stearns in 2008. But why would a bank acquire a failing bank? The balance sheets of banks are the inverse of those of companies. In a company's balance sheet, debt is on the liability side, while in a bank's balance sheet, loans are on the asset side. Banks acquire failing banks to obtain the assets (loans). The Bank of England guarantees to provide funding at a favorable price, and the acquiring bank can use this funding to continue to provide loans.

Similarly, depositors in the acquired bank do not withdraw their deposits because they trust the new owner (and the Bank of England) to safeguard their deposits. The acquiring bank can also sell cross-sell products (such as credit cards, leasing, and private banking) to these customers.

Looking specifically at this operation (the details of which are not clear), SVB's UK branch had a £5.5 billion loan, £6.7 billion in deposits, and £1.4 billion in capital as of March 10, 2023. HSBC acquired these assets for £1, which was a significant operation for them since acquiring such a large amount of deposits and providing loans is not an easy task. However, with the support of a financial powerhouse like the Bank of England, they can inject some capital and create new loans, deposits, and customer portfolios.

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