A branch of Silicon Valley Bank with a long queue of customers looking to withdraw their deposits stretching in front of it.

Image: Bloomberg Mercury

The collapse reminds us of the purpose of capital and liquidity requirements, and raises concerns about the ability of modern technology to fuel deposit flight, writes Tim Skeet.

Spare a thought for all those caught up in the spectacular collapse of Silicon Valley Bank. Some might have felt something was not right, but most would have continued to believe that tomorrow was just another version of yesterday. As the smoke clears, the pundits and pocket experts are already pointing to the inadequacy of the bank’s asset and liability match to explain the demise of this once shiny paragon of cutting-edge finance.

But still, notwithstanding the experience of the financial crisis of 15 years ago, the SVB failure came as a sudden and brutal shock.

Many will recall the traumas of 2007–08 when several banks went down. The unforgettable images from September 2007 of people queuing, carrier bags in hand, to retrieve their deposits from Northern Rock defined the era. A run on deposits is the ultimate sign of a collapse in trust in an institution. A specific set of problems in one market spiralled out of control, fuelled by panicked media reports, and eventually came close to bringing the entire system down in September 2008 with the toppling of Lehman. 

SVB is no Lehman Brothers, but nevertheless, its demise, along with the UBS acquisition of Credit Suisse, has made markets nervous. SVB met its equivalent of the ‘Rock rout’ as its main techie clients and their venture capital/private equity owners rushed to whisk their cash away via app.

According to some sources, the ability to zap cash out online or through an app is some 20 times faster than in the recent pre-app past, and certainly significantly faster than grabbing a zipper bag and physically plodding to the nearest branch. Moreover, if techies in T-shirts and designer sneakers fingering their apps was visually a lot less dramatic than lines of pensioners with bags, it was no less financially destructive. 

News of the rout was instantly transmitted online, in chatrooms or across WhatsApp groups plastered with emojis. This was certainly more instantaneous than watching images of queues from a much-delayed and edited newsfeed. Indeed, banks should take note. A loss of trust and deposit flight can now take place at lightning speed, powered by the very technology that SVB sought to finance.

What of the staff of the bank, most of whom had gone into the week in the belief that they were working at a large and seemingly prestigious financial institution? Having been employed at two US banks at their point of failure, I know what it feels like to have your employer fall apart around you.

Disbelief, incredulity and a sense of powerlessness are the first reactions, followed by cancelling meetings, grabbing your office-based possessions (if you can still get in, although most of SVB’s staff appeared to be remote workers), before tuning into the media for bulletins in the absence of internal lines of communication. 

It’s time to try and be positive, put this down to experience and prepare the ‘war stories’ for the dinner table, complete with trophies or logoed items liberated from the site of a headline-hitting financial fiasco. Today, some Lehman paraphernalia attracts bids on eBay! Who will buy my Kidder, Peabody notepad or Merrill Lynch pen?

Unlike 2007-8, the regulators moved at speed, bending their own regulatory intervention rules in the process by fully guaranteeing all deposits. What had been deemed a non-systemically important bank had suddenly been elevated to systemic importance by the point of failure, to the fury of European regulators (the US did exactly what it had urged others not to do). 

SVB had a ‘touchy-feely’ style that missed out the boring, basic bits of banking

That aside, poor risk control, weak asset and liability management and inadequate basic banking appear the root causes of this mess in the absence of rigorous supervision from the regulators. SVB saw itself as part of the tech revolution, with modern remote working practices, along with a ‘touchy-feely’ style that missed out the boring, basic bits of banking. Indeed, this tech revolution has been disrupted by old-fashioned fear and dull detail.

So, once again those of us in financial services are faced with the old monster of a liquidity crisis turning into a solvency meltdown. Indeed, we are all reminded why the endless cycles of stress-testing, along with the tough capital and liquidity requirements set by regulators as a direct response to the lessons of 2007-8, make sense. 

Those measures alone should prevent another chain reaction of banking bust-ups, even if the overall mood is gloomy. SVB should be a localised mess. Nevertheless, it leaves many seasoned observers shaking their heads in disbelief at the many lessons of the past that were ignored.

Of course, as if SVB was not enough, the latest news comes not from the Silicon Valley, but the Alpine meadows. Switzerland has finally got to grips with the challenge of putting an end to the drawn-out but idiosyncratic saga of Credit Suisse. Can we now all sigh with relief? Let’s not hold our breaths just yet…

 

Tim Skeet is a career banker in the City of London. The opinions expressed are his own.

 

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