Last week, if you had heard of Silicon Valley Bank UK, you probably worked in tech. The bank had only been spun out in to a separate entity last summer, after its few thousand corporate customers pushed it over a regulatory threshold, and while SVB had grown to almost hold £10bn of deposits, with £5.5bn of outstanding loans, it was very much a specialist player.
The bank’s selling point was that it understood the needs of the “innovation economy”, something that high street banks frequently failed to acknowledge. A startup might have zero revenue, yet hold £5m in the bank and have 10 employees, a profile fundamentally different from 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 arrived on the UK scene, it was enthusiastically adopted by founders and venture capitalists alike.
This week, though, things are different. The Gary Lineker row may have held the collapse of SVB off many UK front pages, but it is far closer to a household name than anyone wanted it to be. And yet, as the dust settles, everything looks … OK? The Bank of England just navigated potentially its largest bank failure since Northern Rock, and early appearances are that it managed to protect depositors without throwing taxpayer money at the problem.
Made in America
The story is different in the US, where SVB’s much larger parent organisation was based. There, the tale is one of a mid-sized regional bank growing too fast, avoiding the steely gaze of regulators and then making a series of bad calls until, by the beginning of this week, it was forced to admit it was having solvency issues.
Like its British subsidiary, the US division specialised in providing banking to startups. And it offered a much wider range of services: not only could your startup get a credit card, but you as a founder could get a mortgage, or a loan that let you exercise stock options. There were even deals with venture capitalists that saw some companies receive funding that was conditional on them banking with SVB, letting it offer a truly cradle-to-grave service for companies.
While it innovated in the services it provided, SVB didn’t do as well in the actual job of being a bank. It made a huge bet on interest rates staying flat just months before they started rising, and watched its reserves evaporate. It may have been possible to survive that, but a botched communication of its fundraising plans meant it ended up announcing that it needed money before it had secured any, ultimately scuppering the entire raise.
Customers noticed; in group chats across the tech sector, fears were being raised that SVB was in trouble. Technologically, the American banking sector is a few years behind Europe, with instant transfers being new on the scene, but SVB’s clients were uniquely online and connected. Over just two days, almost a quarter of its reserves were withdrawn, and on Friday morning, the government stepped in to stem 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 wobbled, regulators in Britain had two concerns.
One was simple: might SVB try and cannibalise its subsidiary to keep itself afloat? A similar tactic had been tried at the height of the financial crisis, when Icelandic banks attempted to repatriate funds from British subsidiaries to stave off collapse. The Financial Conduct Authority could theoretically prevent such transfers, literally setting up shop in the subsidiaries offices if needs be, but it is hard to do while the bank operates as a going concern.
The other is trickier. Even if SVB UK was completely solvent and protected from the troubles at its parent, would customers believe that to be the case? A bank run is a maddening thing to have to prevent, because the only thing worse than racing to pull your deposits out of a bank is not racing to pull your deposits out of a bank as everyone else does.
Even though 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, it would face a liquidity crisis. And if it tried to sell its loan book for cash in a rush, that liquidity crisis could easily turn into a solvency crisis, bringing the British subsidiary crashing down, too. By Friday, that £10bn of deposits had already shrunk to £7bn, according to the FT.
So the regulators stepped in and froze the bank. The Bank of England’s process for small troubled banks like SVB is simple: it pushes them into insolvency and lets it progress like normal. Since SVB wasn’t insolvent, the process might have been resolved relatively quickly, with the company either being bought or reconstituting itself, and the run being snuffed out in the meantime. Or it might have seen the company being liquidated entirely, with depositors returned their money at the end of the process.
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That decision, however, didn’t take account of the importance of SVB to the UK tech sector. Startups had their accounts frozen; they turned for help to their funders, the venture capital firms, only to learn that they also had their accounts frozen. Even if there was revenue rolling in, they couldn’t access payments, and if they were able to spin up a second account elsewhere, many of them learned that their own customers also had their accounts frozen.
If the insolvency process progressed as normal, those companies would start to fail. Pressure mounted to find a white knight – a company that would step in and acquire SVB UK root and branch so that it could reopen on Monday as normal.
It wasn’t an impossible sell. Based on where the company stood on Friday, it was worth around £1.4bn. And a number of the largest venture capital firms in Britain signed a promise that the run would be over if a buyer was found. “We would be strongly supportive,” they wrote, “and encourage our portfolio companies to resume their banking relationship with them.”
But any potential buyer would need to waive due diligence, accepting the risk that they would open up a big box marked “£5.5bn of loans” and find cobwebs and an IOU from Elon Musk. And the government, even as it was trying to broker a deal, got a glimpse from the US of the storm that could kick up if it was perceived to be ripping up the rules to protect the investments of tech millionaires. Yet on Monday morning, HSBC stepped up. The company agreed to take over SVB for a notional sale price of £1, keeping the tech sector afloat.
The tech sector isn’t out of trouble yet. While I understand that HSBC intends to keep SVB as an independent arm in the short term, in the mid- to long-term the industry could find itself losing the valuable specialist services that led to the bank becoming such a crucial part of the industry.
For now, though, the story moves back to the US, where the collapse of the parent company has been rather less elegantly solved.
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