You may not have heard of Cali-based Silicon Valley Bank (SVB) until last week, so let’s explore why its downfall caused such a panic and consider what comes next for the sector that could be left behind in the sale of SVB’s UK operation to HSBC – UK fintech.
What actually happened?
To understand how SVB met its demise, we have to go back to 2020.
SVB had seen a significant increase in deposits from cash rich companies in the tech space who had benefited from very supportive funding conditions – bolstered, in part, by a low interest rate environment. But with interest rates low, the lender invested a large portion of the cash from these deposits into long-term US Government bonds, taking on greater duration risk in exchange for a higher return on more liquid assets.
Then came rising interest rates and the slowdown in the tech sector, which not only saw a number of companies go under and thousands lose their jobs, but also created a more challenging funding environment for those businesses looking to raise capital. The culmination of these factors led to depositors withdrawing funds at an alarming rate. The bank had invested short term deposits into long term bonds and SVB was left short on cash, apparently had not hedged its risk adequately, and was forced to sell the bonds it bought at such volume so recently. However, as a result of the Fed hiking interest rates in response to soaring inflation, the bonds had depreciated substantially in value.
The fallout: A bank run in the Networked Age
Late Wednesday 8th March, SVB’s parent company, SVB Financial Group, announced via a message to stakeholders that it was looking to raise close to $2bn in capital, to plug the hole in its balance sheet. This spooked depositors and within 48 hours enough money had been withdrawn by this bank run to cause the collapse of the bank.
In the Networked Age, information and misinformation have the potential to spread incredibly rapidly, compounding the effects of a sudden swing in market sentiment. And there’s no doubt that social media had an important role to play in the speed at which the bank run took form. Fear spread like wildfire through Twitter, Whatsapp and Reddit, causing viral panic. Michael Imerman, professor at the Paul Merage School of Business, told The Guardian that what happened to SVB was, “a bank sprint, not a bank run, and social media played a central role in that.” Even executives publicly weighed in on the developing news; Mark Tluszcz, CEO of Mangrove Capital tweeted, “If you are not advising your companies to get the cash out, then you are not doing your job as a board member or as a shareholder.” It was clear that SVB had completely lost control of the narrative.
Amid fears of contagion, quick and decisive action was taken over that weekend. Sunday 12th March saw the Fed, US Treasury, and FDIC announce steps to ensure deposits were secured in the US. Meanwhile, the Bank of England, in consultation with the UK Treasury, announced on Monday 13th March that the UK arm had been bought for £1 by HSBC.
Effect on the UK fintech sector
It’s no great secret that the UK fintech space has endured a rocky few months following interest rate rises, with analysis by the UK Trade and Business Commission revealing that almost twice as many UK fintechs have made layoffs compared to their EU-headquartered counterparts.
In the UK, SVB was the self-proclaimed go-to banking partner for founders, entrepreneurs, and investors in the Innovation Economy. Although the bank supported an array of businesses across the technology and life sciences industries, many of whom will be amply supported by HSBC, the effects on UK fintechs and digital assets businesses are yet to be realised.
There is some concern that HSBC’s “legacy bank” status could mean that innovation is left at the door, and it’s easy to see why when we consider the bank’s stance on crypto and digital assets. A source even told the Financial Times that crypto and digital assets businesses that have moved over as part of the SVB sale “will probably leave [HSBC], either of their own accord or being politely off-boarded,” as “life would be too hard as a customer of HSBC.”
More widely, we expect to see start-ups and scale-ups diversify their savings, and consider swinging back towards traditional banks, who will be able to tell a compelling story of stricter financing requirements and due diligence processes. In essence, the collapse of SVB has exacerbated an existing communications challenge for challenger banks: in the absence of a longstanding track record, how do they build trust with prospective customers? The need to demonstrate the robustness of their models and due diligence processes will undoubtedly be paramount to their success and perceived reliability in the future.
Only time will tell what the future has in store for HSBC’s relationship with SVB customers, but there are positives and lessons we can take from the episode. Not least among them is the speed at which the tech sector came together to campaign, and how quickly SVB was prioritised by the Bank of England, Government and ultimately HSBC – demonstrating a recognition of the value and importance of the sector to the UK economy.
By Emily Shea-Simonds