LLast week, if you had heard of Silicon Valley Bank UK, you probably worked in tech. The bank had only become a separate entity last summer, after its few thousand corporate clients pushed it over a regulatory threshold, and although SVB had grown to nearly £10bn in deposits, with £5.5bn million pounds sterling in outstanding loans, He was very much a specialist gambler.
The bank’s selling point was that it understood the needs of the “innovation economy,” something commercial banks often failed to recognize. A startup can have zero revenue, but have £5m in the bank and have 10 employees, a fundamentally different profile than a typical small business. As a result, trying to get something as simple as a corporate credit card could be a surprising hassle, and when SVB hit the UK scene it was enthusiastically embraced by founders and venture capitalists alike.
This week, however, things are different. Gary Lineker’s row may have hidden SVB’s collapse on many a UK front page, but it’s a lot closer to a household name than anyone would have wanted it to be. And yet, as the dust settles, everything seems… okay? The Bank of England has just navigated its biggest possible bank failure since Northern Rock, and first appearances are that it managed to protect depositors without throwing taxpayers’ money at the problem.
made in america
The story is different in the US, where SVB’s much larger parent organization was based. There, the story is of a midsize regional bank that grows too fast, avoids the iron gaze of regulators, and then makes a series of bad decisions until, earlier this week, it was forced to admit it was in trouble. of solvency. .
Like its British subsidiary, the US division specialized in providing banking services to start-ups. And it offered a much broader range of services: Not only could your startup get a credit card, but you, as the founder, could get a mortgage or a loan that allowed you to exercise stock options. There were even deals with venture capitalists where some companies received funds conditional on them banking with SVB, allowing them to offer a true cradle-to-grave service for companies.
While it innovated in the services it provided, SVB did not do as well at the actual job of being a bank. He made a big bet that interest rates would hold steady just a few months before they started to rise, and watched his reserves evaporate. It may have been possible to survive that, but a miscommunication of his fundraising plans meant he ended up announcing that he needed money before he got it, which ultimately scuttled the entire raise.
Customers took notice; In group chats across the tech sector, fears were raised that SVB was in trouble. Technologically, the US banking industry is a few years behind Europe, with instant transfers being a new thing on the scene, but SVB’s customers were only online and connected. In just two days, almost a quarter of their reserves were withdrawn and on Friday morning the government intervened to stop the flow.
across the pond
But here’s the thing: SVB UK was fine. The company was a legally distinct subsidiary of the US parent, with a much healthier balance sheet. Yet as California reeled, British regulators had two concerns.
One was simple: could SVB try to cannibalize its subsidiary to stay afloat? A similar tactic had been tried at the height of the financial crisis, when Icelandic banks tried to repatriate funds from British subsidiaries to avoid collapse. In theory, the Financial Conduct Authority could prevent such transfers, literally setting up shop in the subsidiaries’ offices if necessary, but that is difficult to do while the bank is operating as a going concern.
The other is more complicated. Even if SVB UK were fully solvent and shielded from the problems of its parent, would customers believe that to be the case? It’s maddening to have to prevent a bank run, because the only thing worse than running to get deposits out of a bank is No running to get their deposits out of a bank like everyone else.
Although SVB UK was solvent, £5.5bn of its assets were in the form of loans. If too many depositors tried to withdraw their money at once, they would face a liquidity crisis. And if it were to try to sell its loan book for cash quickly, that liquidity crisis could easily turn into a solvency crisis, also causing the British subsidiary to collapse. By Friday, those £10bn of deposits had already been reduced to £7bn, according to the FT.
So the regulators stepped in and froze the bank. The Bank of England process for small troubled banks like SVB is simple: it pushes them into insolvency and allows them to progress normally. Since SVB was not insolvent, the process could have been resolved relatively quickly, either by buying out the company or by reconstituting it, and the run would have stopped in the meantime. Or you could have seen the company liquidate entirely, with depositors returning their money at the end of the process.
A technological bank
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However, that decision did not take into account the importance of SVB to the UK technology sector. Startups had their accounts frozen; they asked their sponsors, the venture capital firms, for help, only to learn that their accounts were also frozen. Even if there was income, they couldn’t access payments, and if they were able to open a second account elsewhere, many of them found out that their own customers also They had their accounts frozen.
If the insolvency process proceeded normally, those companies would start to go bankrupt. Pressure mounted to find a white knight, a company that would step in and acquire the root and branch of SVB UK so it could reopen as normal on Monday.
It was not a impossible sale. According to the company’s position on Friday, it was worth around £1.4bn. And several of Britain’s biggest venture capital firms signed a pledge that the run would end if a buyer was found. “We would strongly support them,” they wrote, “and encourage our portfolio companies to resume their banking relationship with them.”
But any potential buyer would have to forego due diligence, accepting the risk of opening a large box marked “£5.5bn loans” and finding cobwebs and an IOU from Elon Musk. And the government, even as it was trying to broker a deal, caught a glimpse from the US of the storm that could be unleashed if it was perceived to be breaking the rules to protect the investments of tech millionaires. However, on Monday morning, HSBC stepped up. The company agreed to take over SVB for a notional asking price of £1, keeping the tech sector afloat.
The tech sector is not out of trouble yet. While I understand that HSBC intends to keep SVB as an independent arm in the short term, in the medium to long term the industry could lose the valuable specialist services that led the bank to become such a crucial part of the industry.
For now, however, the story shifts back to the US, where the collapse of the parent company has been resolved rather less elegantly.
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