Once regarded as the exemplary bank of the tech industry, the news of regulators closing the bank after depositors rushed to withdraw their funds brought Silicon Valley Bank to the attention of most banking customers worldwide. It has raised questions about how a bank that most taxpayers were not aware of before the collapse has sparked global fears of a similar financial crisis to the 2008 crisis, and if any lessons have been learned from the past.
Silicon Valley Bank was founded in 1983 as a small community bank catering to growing tech companies, and quickly cemented its position as the leader in funding early-stage companies.
The climb up to the top was not always a steady one, with the company making frequent ill fated decisions that plummeted its stock.When Lehman Brothers lost over $619 billion from failed subprime loan investments, leaving the world in a fragile economic state, the bank seemed to have learned a lesson. After refocusing its efforts on serving companies ranging from climate to medical research tech companies and becoming a bank partner for nearly half of venture-based tech and healthcare companies listed on the 2022 stock markets, the bank repositioned itself as a reputable banking service.
The 48 hour fallout
In short, the 48-hour fallout was unexpected.
The fallout of the bank came just one day after Gregory Becker, the chief executive of SVB brashly announced to an audience of investors that the future of the tech industry was sparkling-with SVD right at the heart of it all. That confident proclamation came crumbling down when a day later Becker announced a $1.8 billion loss that spooked and triggered panic among bank depositors who scrambled to withdraw their money-roughly $40 billion in total.
In the wake of the bank's share prices tumbling past 60%, the SVB was well and truly dead. In a rash attempt to remedy a precarious situation, the Federal Deposit Insurance Corporation took the matter into its hands by taking over the bank on the same day and opening it up for auction to prevent another financial crisis. The FDIC’s reaction towards the crisis parallels Joe Biden’s response, as he announced that regular taxpayers would need not worry about the fallout as the leadership of SVB would be solely responsible-a contrast to the 2008 crisis when taxpayers involuntarily paid the price.
Having a wide range of tech companies to cater to in the UK, the bank has enjoyed a longstanding position as a reputable bank. Although the bank's UK deposits have remained below 0.2% (a threshold of £100m), its services have greatly contributed to the growth of tech companies and the country's economic growth.
The bank, which reached the £100 million threshold in 2022, consolidated its position as a provider of services to high-growth startups by offering specialised services other banks were reluctant to provide. Alongside offering services to tech companies, the bank has a hold over life science companies, notably the NHS-leaving many concerned about how this would affect those in the UK.
With news of the SVB’s insolvency spreading to the UK, the UK treasury and the Bank of England began to scramble to lessen the fears of tech industry players who feared being wiped out. After a weekend of frantic talks between the government, regulators and prospective buyers, the treasury and the Bank Of England presented a deal that left tech companies dumbfounded.
HSBC (HSBA.L), Europe’s largest bank with a balance sheet of almost £2.5 trillion, announced that it would be the knight in shining armour for the UK's start-up industry. The swift and unprecedented decision came after tech companies voiced their concerns that SVB’s potential failure could cause shockwaves throughout the UK’s start-up industry. The global bank announced that it would acquire SVB UK for less than the cost of a carton of milk. As one of many bids from banks and investors, HSBC's bid was selected by the Bank of England for its size, resources, and longstanding stability in the banking industry.
A repeat of the past?
Whilst many were expecting the fall of the bank to replicate the financial crisis of Washington Mutual in 2008, which lead to widespread layoffs and extended periods of unemployment worldwide the full-speed reaction taken by both the US and UK governments displayed how dire it is for governments to have strict rules in place to ensure that taxpayers do not take the brunt of protecting the bank sector at a time when the economy is already sluggish.
For now, taxpayer worries may be placated.
However, it is crucial to note that, despite Joe Biden's announcement that liquidity measures had been in place since the 2008 financial crisis in the US, there are no liquidity measures in place in the UK to guarantee banks have the sufficient risk-adjusted liquid capital to prevent an economic downturn that could leave taxpayers stranded. It remains to be seen whether the existing risk reduction policies have averted a disaster, or opened Pandora's box.