Execs warn Britain’s digital finance businesses under pressure after banking upheaval

Executives in Britain's digital finance sector say they are feeling the effects of the recent financial turbulence.

April 21, 2023
Execs warn Britain's digital finance businesses under pressure after banking upheaval
Matt Crabtree

Written By

Matt Crabtree

 
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April 17 (Reuters) — LONDON Executives at a business conference on Monday warned that the collapse of U.S. technology lender Silicon Valley Bank (SVB) will make it harder for digital finance businesses in Britain to secure capital owing to rising interest rates and investor anxiety.

Since December 2021, the Bank of England has increased interest rates 11 times to combat rising inflation, which has had a negative impact on living standards. However, the increases have caused corporations to incur greater finance expenses.

Impact of SVB on digital banking

The collapse of SVB last month, which frightened investors, according to Anil, might lead to a widespread shakeup in the digital financial industry (digital banking).

Trade group Innovate Finance warned last month that Britain's digital banks would require assistance over the next several months to help them deal with the market repercussions from SVB's bankruptcy.

Augmentum CEO Tim Levene warned attendees that more setbacks were on the horizon and that start-up values would continue to fall. It's certain that some organisations will fail during the next year, but that's the risk you take when investing in startups, he said.

According to The Financial Times on Sunday, the Bank of England is exploring a revamp of its deposit guarantee system, which may involve increasing the amount guaranteed for companies if lenders run into problems.

During the London event, Sam Everington, a senior executive of British digital bank Starling, said that the Bank of England reviewing the laws was the prudent thing to do.

CEOs of digital banking companies have expressed confidence that their industries will thrive despite the current economic climate, despite growing pressure on business models.

Even though many in the digital finance business had only ever seen historically low interest rates, Funding Circle CEO Lisa Jacobs was convinced the sector could prove its worth.

UBS rescue of Credit Suisse not enough to quell fears 

As the BoE fights inflation, David Solomon has warned that the banking crisis has sent shockwaves across the financial markets and may slow lending and government fundraising.

When discussing the March failure of Silicon Valley Bank and Signature Bank, Goldman Sachs' CEO emphasized the far-reaching, historic consequences of that event.

He pointed out that the bank failures caused a wave of downgrades in credit ratings and large drops in financial sector valuations, and that this in turn prompted Swiss authorities to organize an emergency purchase of Credit Suisse by UBS.

Only four occasions in the previous 25 years have 2-year Treasury rates changed by 50 bps or more). The chief executive officer of an investment bank pointed out this fact.

On March 13, 2-year Treasury rates had the largest one-day change in over 35 years, as noted out by Solomon. He said the turmoil was a “real-life stress test” that proved the stability of Wall Street's largest banks but warned of potential long-term effects.

We could see transformations in digital wallets. Investors are further speculating on the value of gold.

Takeaway

With the present condition of the economy, recent developments in the banking sector are dampening growth projections, and the atmosphere is reducing banks' desire to offer credit, so a credit contraction is more likely, he added. The economic picture continues to cause us to exercise caution.

Since the financial crisis has shaken investors and dimmed economic prospects, Solomon cautioned that demand for raising money in public markets and conducting mergers and acquisitions would certainly decline.

It was a strange few weeks with abnormally high volatility. It slows down or makes individuals delay bringing goods they were planning to put into the financial markets when there is so much volatility.

Even before the financial turmoil, Solomon knew he was in for a testing time. Tighter monetary policy, he warned in February, may stifle economic development and increase unemployment.

He projected the Federal Reserve would have to raise rates beyond 5% to manage persistent inflation. He did, however, imply that the US economy had a chance of avoiding a deep downturn.

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Mentioned Banks

About Credit Suisse Credit Suisse is a Swiss multinational investment bank and financial services company. Founded in 1856, it is the second largest bank in Switzerland and is...
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About UBS Group UBS Group is a Swiss investment bank and financial services company. Headquartered in Zurich and Basel, it is the largest Swiss bank in the world and operates across...
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