Silicon Valley Bank: ‘Rapid demise’ accelerated by having single client type

The “rapid demise” of Silicon Valley Bank (SVB) in the US, triggering the sale of its UK arm to HSBC, was due to SVB’s reliance on one type of client and should prompt fintechs to diversify their “financial stack”, according to industry commentators.

On Friday 10 March, the Federal Deposit Insurance Corporation (FDIC) in the US took control of fintech lender Silicon Valley Bank’s assets, following a run on the bank.

Tony Petrov, chief legal officer at Sumsub, an online identity verification service, explained that SVB had invested in long-run US Treasury papers and that, when the Federal Reserve increased interest rates, “those papers that SVB had bought effectively lost their value”.

Petrov added: “This situation provoked a bank run and SVB failed.”

In a statement, US President Joe Biden told Americans they “can have confidence that the banking system is safe” and added, “your deposits will be there when you need them”.

Over the weekend, the UK Government and Bank of England facilitated the sale of SVB UK to HSBC for £1, to safeguard customers’ deposits without relying on taxpayer money.

The argument for diversification

Gregory Marchat, UK head of financial services at Mazars, said: “Despite following regulation and having a good capital and liquidity ratio, the developments around Silicon Valley Bank (SVB) over the last few days show that being in a very concentrated sector requires adaptation to the standard rules.

“The regulators have been focusing on business model and profitability for some time, which is a way to ensure management integrates their own specific business characteristics in their appreciation of risks.

“It seems this was not managed properly in the case of SVB, particularly regarding asset liability management.”

Marchat added that the collapse of the bank showed that having a single client type “is an accelerant to a potential bank run”.

“Similar firms tend to react in a similar way, and this was a key factor in SVB’s rapid demise,” he said.

Hristo Borisov, chief executive officer and founder of UK-headquartered fintech Payhawk, said that, as a result of the SVB crash, start-ups will “evolve” how they interact with money.

“The majority of tech companies are now likely to add other bank accounts, credit cards, and so on, to their financial stack; and also diversify their supplier, vendors and critical business infrastructure, in order to reduce over-reliance on any one particular provider,” Borisov said.

However, he added: “The incident highlights some longer-term concerns, and it should be seen as an important lesson, not only to start-ups, but also to their investors that actively contributed to the spreading of fear, and ultimately the bank run that occurred.”

Borisov suggested that, in order to avoid a similar event “some backstops from the regulators” might be required.

Across the pond

In the UK, the acquisition of SVB’s UK subsidiary by HSBC was facilitated by the central bank, in consultation with the Treasury, using powers granted by the Banking Act 2009, which was introduced after the financial crisis.

“Encouragingly, the news of the rescue shows that the UK resolution framework works very well, as it only took a weekend to organise the sale of the bank and ensure clients’ assets would be preserved and taxpayer money wouldn’t be used,” Marchat said.

Aman Behzad, managing partner at Royal Park Partners, called it “inspiring” to see the UK Government working closely with the industry to find a timely solution, “and safeguard the innovative businesses that are vital to our economy’s growth”.

What happens next?

While there are lessons to be learned, according to Ilya Volkov, chief executive officer and co-founder of YouHodler, a Swiss-based international fintech platform, the US government’s response has been “positive”.

“The Biden administration said all bank customers will have full access to their deposits to calm the panic and save other small and regional banks,” Volkov said.

“If the central banks can stop the contagion, then that is a huge success. If not, then similar events could happen and cause further volatility.”

Ultimately, Volkov believes that the tech industry will recover.

“This event exposed some faults in venture capitalism and banking regulation, but I’m confident these problems will be addressed to minimize failure in the future,” he added.

Payhawk’s Borisov said: “My expectation is that the aggressive increases of interest rates added a lot of stress to the system, and that central banks might have to look for alternative approaches to how they manage inflation and overall market stability.”