27 April 2023
In a matter of a few days, three banks collapsed:
- 9 March: Silvergate Capital Corp, a bank focusing on providing services to the cryptocurrency sector, shut down in the face of the crypto-market turmoil, following the collapse of crypto-exchange FTX, which it had links with. This was following the tumble with crypto assets last year, which has seen other organisations in the sector fall victim to the ‘crypto winter’;
- 10 March: Silicon Valley Bank (SVB), the only publicly traded bank focused on tech and start-ups; more on this below; and
- 12 March: Signature Bank, which had a number of crypto companies as customers, sparking another blow to the crypto sector. The bank collapsed despite its retreat from digital assets following the demise of FTX, and upward of $15bn in crypto related client deposits in March 2023.
Then, within a matter of days, Credit Suisse, established in the mid-19th century, was taken over by local rival, UBS.
SVB is the second largest bank holding company failure since Washington Mutual. Lehman Bros wasn’t exactly a bank holding company - there were sales involved – and it is worth remembering that we are also in a very different place than we were in 2008, which was more of a credit event with poor loans and undercapitalised bad credit. Although this failure is unique in nature, that does not prevent the risk of contagion.
This article explores the fallout of SVB, what this means for UK tech and the impact of the US banking ripple effects of on the economy as a whole.
Silicon Valley Bank
SVB was the 16th largest bank in the US with 16 branches. Its clientele were tech start-up companies, Venture Capital (VC) firms, tech founders and workers. For many (and particularly those in California), SVB was synonymous with the US Tech ecosystem, standing side-by-side with other key pillars of the community. This made the bank uniquely exposed to certain risks. With over 90% of those businesses having deposits that go far beyond the insured total of $250k – these customers had an incentive to run if spooked. These cover some players like Roblox, with 5% of their balance, Roku 26%, and Rocket Lab with 7.9%.
SVB also had a presence in the UK. The SVB UK arm, ringfenced from the US group, is said to have around 3,300 UK clients, working mainly with start-ups, venture backed companies and funds. Whilst the Bank of England, during the turmoil, stated that “Silicon Valley Bank has a limited presence in the UK and does not perform functions critical to the financial system”, SVB did have a sizeable presence, reputation and influence within the UK Tech ecosystem.
A significant proportion of funds held within SVB was capital raised, following funding rounds. Banking tech start-ups means holding fund-raises that are then burned by the business to turbo-charge rapid growth. When the number and value of tech funding rounds slowed this created a challenge for SVB as surplus liquidity built up. As is routine for banks like SVB, this liquidity was invested in a supposedly safe bond portfolio. The challenge was that as interest rates rose, the value of the largely fixed interest portfolio fell dramatically. When faced with a liquidity crunch, SVB was forced to crystalise losses as it liquidated assets to keep up with the rate of withdrawals by its borrowers.
The bank announced that it needed to raise capital to replace the funds eroded by the losses and of course this only made the problem worse as panicked depositors and investors demanded further withdrawals. Prominent venture capitalists advised their portfolio businesses to pull cash from the bank. The result? Collapse of the share price and the tech community rushing to withdraw their funds en-mass.
This raises a few critical questions for SVB and US regulators. In particular, how and why SVB didn’t understand its exposures to interest rate rises – doing so should have flagged the issue well before it happened. Equally, risks like this are typically managed using a hedging strategy. The fact this didn’t happen will be the subject of debate in the industry long into the future both in the US and in other jurisdictions like the UK which are currently contemplating simpler regulatory regimes for smaller banks, as was the case for SVB in the US.
US banking regulations protect deposits in excess of $250k (UK £85,000 limit). Most SVB depositors had balances far in excess of this.
The number of users that withdrew their deposits resulted in a technical failure, and the bank was then placed into receivership by the Federal Deposit Insurance Corp.
The ‘fix’ in US and UK
The US Treasury and Federal Reserve stated on 12 March that all depositors of SVB and Signature Bank would be made whole and be able to access their money by the following day and equity and bond holders would be zeroed. The Federal Reserve also announced a new lending facility, whereby lenders will be able to draw from, for up to a year, by pledging collateral - they offered other banks a lifeline to take whatever government bonds trading below their par value and give financing for them at par value. This is a similar approach to that taken during the pandemic.
Whilst this was not a bailout, it was a programme to protect depositors and prevent a larger run on the bank system. The Federal Deposit Insurance Corporation was running an auction for SVB, which was not initially successful over the turbulent weekend and is why the Federal Reserve stepped in so soon. The US SVB was later purchased by First Citizens Bank.
The UK Government announced a similar intervention to contain the damage and ensuring the tech community that were customers of the SVB UK arm still had access to cash to meet payroll and billing demands. On the morning of 13 March, in the UK, however, it was announced that HSBC had acquired SVB for £1, so becoming part of the ringfenced UK HSBC business and protecting the £6.7bn that it had in deposits.
The approaches of the regulators in the US and UK have addressed the biggest risk of contagion and prevent depositors more broadly to start pulling funds from other smaller banks with the thought of whether they would want to leave all of their company money in a relatively small regional bank, when share prices fall by a lot and are seemingly facing similar risks to SVB, and consider moving the funds to much larger banks. This could result in lenders facing pressure to sell assets at a loss causing bank runs, even if these banks are in sound economic health otherwise. The intervention helps prevent the loss on paper becoming actual loss.
Additionally, without intervention, as tech and life sciences firms are faster growing and have higher productivity levels in the UK, a negative response could have resulted in a hit to GDP in the medium term due to a number of these organisations going out of business as they would not be able to make their payroll, exacerbating to the already substantial tech layoffs. Tech firms have only existed in an environment of zero/low interest rates and are now facing enormous difficulties in adjusting to the new cost of capital. Many of those firms were negatively impacted last year during the crypto winter when digital assets they had on their balance sheets failed and are also the ones that had deposits at SVB and similar banks, so will be in the position now of looking for new places to store their money, despite the interventions.
SVB’s collapse has also resulted in share prices tumbling for other regional banks within the US. The regional banks are not necessarily as regulated and as well-examined as the larger banks. The impacts have also been felt across financial sectors across the world, including in Europe, Asia and Australasia.
In the future, the regulators may reconsider the level of deposit insurance, with pressure to guarantee a far higher amount (perhaps unlimited), switching the focus from the individual customer to businesses. With this approach, there will be a need to balance customer protection with the input of the regulators as well as financial institutions. Additionally, there is likely to be greater focus on the impact of rate rises and the impact of long-term bonds with increased scrutiny in the US for mid-sized banks covering capital and liquidity requirements as well as stronger annual stress tests.
What next for Tech?
For many it is time to take a deep breath before diving into the real consequences of the events of SVB. The sheer speed of the story moved so quickly that all tech companies with holdings in SVB in the US and the UK will have had pressured time considering their options and developing contingency plans.
Many tech companies will have opened separate banking facilities with banks who have been able to process timely KYC processes. Now that SVB deposits are insured and stabilised the urgency to move funds has dropped away, but many will still choose to consider carefully how their balances on deposits are held to mitigate against further credit risk. Treasury management is firmly in focus. Many tech companies are subject to restrictions linked to funding rounds that require the use of SVB facilities – and they will need to consider these requirements as they review options this week.
Finance teams will be tackling operational issues to ensure that payrolls are processed on a timely basis. There are reports of difficulties with the mechanics of operating bank accounts and connections with ERP and payroll systems. These are hurdles that can be overcome but take time and patience against a backdrop of ensuring the workforce and suppliers are paid. Many of these Tech companies are transatlantic and finance teams are grappling with differing processes and tasks either side of the Atlantic.
To further add complications – many companies and individuals changed banks in the runup to SVB collapse and may choose to do so in the aftermath. Tech companies are now inundated with requests to change bank account detailers for customers, suppliers and workers. This, against a backdrop of exhausted finance teams working long hours across multiple time zones, creates an opportunity for supplier payment fraud. Whilst business leaders will want to stabilise their organisations amid the turmoil, while also moving forward urgently, they should be mindful that the finance functions working through this backlog will need to be treated with patience. As we saw during the pandemic, cyber fraudsters will use times of chaos to their advantage and finance functions need be empowered to operate with vigilance.
The collapse of SVB is the latest of a raft of stories knocking the wind out of the Tech sector. SVB was a crucial stakeholder in the United States and it remains to be seen what the impact will be. In the United Kingdom the landscape has changed with banks potentially taking a more prominent role. The Government’s decision to award the £12m government growth grant to Barclays Eagle Labs in January changed the landscape of the Tech ecosystem. HSBC now will be working with reportedly an additional 3,300 clients following their acquisition of SVB, with plans to inject £2bn of liquidity into the division.
The current banking shock is one that was seemingly abated, but not entirely eliminated and is a reminder that the UK is vulnerable to failures elsewhere. It is now for the regulators to strike the balance of depositor protection as well as encouraging banks to behave in a more responsible manner internationally.