Silicon Valley Bank (SVB) has been a cornerstone of the tech industry since 1983, playing a key role in funding some of the most successful startups in Silicon Valley. Almost half of US venture-backed technology and healthcare companies listed on stock markets in 2022 had Silicon Valley Bank as their banking partner.
However, in recent months, the bank has faced significant challenges that ultimately led to its collapse on the morning of Friday 10th March. In this article, we explore the background to SVB’s collapse and the key takeaways from a tumultuous weekend that culminated in the second largest bank failure in American history.
What happened to Silicon Valley Bank?
As the preferred bank and lender for many innovative startups, tech businesses and venture capital firms, Silicon Valley Bank felt the full force of the recent challenging economic conditions.
Just like banks the world over, SVB invested a large portion of customer deposits, having invested heavily in long-dated US government bonds – essentially lending money to the US government which, in turn, the government agrees to pay back at a later date with interest.
Government bonds, however, have an inverse relationship to interest rates, i.e. when interest rates rise, bond prices fall.
Usually when this happens, it’s not really an issue for investors as firms would have simply waited for the bonds to mature.
However, since SVB’s client base was largely made up of start-ups and technology firms, the recent reduction in venture capital and the slowdown in the tech industry in general had been slowing deposits into the bank, as clients withdrew their funds to pay staff, suppliers and overheads.
SVB’s bond investments started to lose value significantly when the Federal Reserve started to raise rates rapidly to combat inflation. With little by way of cash reserves, SVB began selling some of its bonds at a near $2bn loss, spooking investors and customers to withdraw their money en masse from the bank post-haste.
It took a mere 48 hours from the time SVB disclosed the sale of these assets to its ultimate collapse.
What will happen to SVB’s customers?
The most immediate question was what would happen when customers needed to access their money, pay their employees or suppliers?
In the US, the bank has been shuttered and the Federal Deposit Insurance Corporation (FDIC) appointed as receiver to liquidate the firm’s assets and pay back its customers.
Closer to home, HSBC (UK) purchased Silicon Valley Bank UK in a £1 rescue deal early on Monday morning (13th March). This means that SVB’s UK customers can access their deposits and banking service as normal. HSBC will take on SVB UK’s 3,500 customers with deposits worth more than £6.7bn.
The fallout of SVB’s collapse
Innovate Finance, the UK’s independent industry body that represents the global FinTech community in the UK, held a webinar on Monday afternoon examining the impact of SVB’s collapse, and there are some key points of note emerging as the dust settles on days since the bank’s demise.
Prior to this weekend’s events, the president of SVB had successfully lobbied Congress to reduce regulatory scrutiny and “to exempt more banks – including his own – from new regulations passed in the wake of the 2008 financial crisis,” (The Guardian).
As a result, SVB was exempt from more frequent and detailed analyses conducted by regulators to determine if a bank has enough capital to survive a crisis.
As of Monday, Silicon Valley Bank USA was in a much better position than it was 24 hours prior. On Friday, SVB was closed by its California regulator and the FDIC was appointed a receiver. The FDIC protects deposits of up to $250,000 in the event of a bank failure.
The FDIC stepped in to reassure depositors that their insured funds would be available as of Monday morning (13th March). At the point of SVB’s demise being made public, depositors were informed that uninsured funds would be made available in part later this week, but the amount of uninsured deposits was unclear and not guaranteed.
The FDIC’s Deposit Insurance Fund (DIF) is available to cover uninsured funds if the sale of SVB assets is not sufficient to cover depositors. Since the initial announcement of SVB’s closure, the US government has assured citizens that this won’t be a taxpayer funded bailout.
The key takeaway for clients of SVB US is that there is no need for immediate rush to withdraw funds as all deposits will be covered through the FDIC and DIF. However, the recommendation from Innovate Finance’s recent webinar is to start making inroads into establishing new banking relationships in the US, but there is not such a rush that it needs to be in the next day or two.
Here in the UK, the situation moved incredibly quickly with regards to the UK arm of Silicon Valley Bank. But, as of 7am Monday morning, SVB UK is a wholly owned subsidiary of HSBC UK.
Silicon Valley Bank exists in the UK as it did on Friday, just the owner of the bank has changed. A statement from the Bank of England made it clear that contracts and employees remain in place, and the bank is still authorised.
The Bank and His Majesty’s Treasury can confirm that all depositors’ money with SVBUK is safe and secure as a result of this transaction. SVBUK’s business will continue to be operated normally by SVBUK. All services will continue to operate as normal and customers should not notice any changes.Bank of England
Looking ahead, HSBC’s decision to purchase Silicon Valley Bank is a positive story for UK FinTechs and their appetite to expand operations into this space.
A cautionary tale for FinTechs
The failure of Silicon Valley Bank highlights the importance of effective risk management. FinTechs need to have robust risk management systems in place, particularly when dealing with high-risk borrowers and sectors.
What’s more, the events of the last few days reiterate the importance of effective strategic planning. FinTechs must be strategic in their approach to growth and expansion. It is important to concentrate on sustainable growth rather than trying to expand too quickly or taking on excessive undue risk.
The collapse of Silicon Valley Bank is a cautionary tale for FinTechs focused on lending or providing financial services to startups. Effective risk management, compliance controls, and strategic planning are critical for success in this space. Firms that prioritise these areas will be well-positioned to navigate the challenges and capitalise on the opportunities in this rapidly evolving industry.