The writer is founder of Sifted, an FT-backed site about European start-ups
As the 16th largest bank in the US, Silicon Valley Bank was not big enough to rank as a systemically important financial institution. But, if many of its distressed depositors are to be believed, the collapsed bank still counted as a technologically important one.
It may stick in some throats that the US and UK financial authorities have had to engineer an emergency rescue for an institution, and an industry, that is so fond of railing against government intervention and lobbying against stricter regulatory oversight. Still, it is a pragmatic move to shelter tens of thousands of SVB’s mostly blameless depositors, many of whom would have seen their businesses go bust without a financial backstop.
In the US, the Treasury and Federal Reserve announced on Sunday night that the Federal Deposit Insurance Corporation would provide emergency funding to protect SVB’s depositors, even if shareholders and bondholders would be wiped out. The FDIC is also looking to offload SVB’s remaining assets as soon as practicable.
Hours later, the UK Treasury announced that it had approved the sale of SVB’s significant UK offshoot to Europe’s biggest bank HSBC for a symbolic £1. Cue massive sighs of relief among panicking tech entrepreneurs, who had spent their weekends frantically working out how to pay their employees this week.
Both national authorities stressed that their taxpayers would not be exposed to any losses. In the US, officials said that any shortfall would be covered by a levy on the rest of the banking industry.
However, both interventions still raise niggly questions about the extent and effectiveness of financial regulation. US officials said that Janet Yellen, Treasury secretary, had invoked a “systemic risk exception” to justify the support. What further lurking horrors will be revealed in the era of rising interest rates?
The SVB fiasco also shines an unforgiving spotlight on the hypocrisy of some of the biggest venture capital players on both sides of the Atlantic, who privately urged their portfolio companies to pull their money from the bank and then later publicly called for government support. SVB collapsed on Friday as a result of a classic bank run after customers withdrew $42bn of deposits.
Just like many of the banking titans after the global financial crisis of 2008, tech tycoons appear to favour the privatisation of profits and the socialisation of losses. There are few libertarians in a financial foxhole.
With hindsight, it is clear that some of the reasons for the remarkable rise of SVB over the past 40 years were also the causes of its stunning collapse in less than 48 hours last week. For decades, the bank served a critical function in the US tech economy by focusing narrowly on providing services for risky, collateral-light tech start-ups that were far from ideal customers for traditional financial institutions. The bank also managed the personal finances of many tech entrepreneurs and investors and invested in several venture funds as a limited partner.
SVB boasted of providing services to almost half the venture capital-backed tech and life sciences businesses in the US as well as start-ups across Europe, India, Israel and China. But at the end of 2022, it held $157bn of deposits across just 37,000 accounts.
That concentrated exposure enabled the bank to ride the extraordinary bull market in tech over the past two decades. But it also left it singularly exposed in the downturn. What proved fatal for SVB was an excessive, one-way bet on the US Treasury bill market after the interest rate cycle turned.
“It turned out that one of the biggest risks to our business model was catering to a very tightly knit group of investors who exhibit herd-like mentalities,” one senior bank executive told the FT.
The near-death experience of thousands of start-ups exposed to SVB is certain to have a salutary impact across the tech sector. “If we can’t manage our own money better, that is on us, not the taxpayer,” one founder concluded at the weekend.
The deft action by regulators may have defused an industry-wide crisis. But treasury management is now likely to rank up there with product development and customer acquisition as a vital survival skill.