Regulators on both sides of the Atlantic have worked hard and fast to contain the fallout from SVB’s meltdown. But what actions could have been taken to avoid this disaster?
This article was originally published on March 14, 2023.
The collapse of niche lender Silicon Valley Bank (SVB) Financial Group – the largest US bank failure since the 2008 financial crisis – has shaken overall confidence in the banking industry and the tech start-up community. But the speed with which regulators in the US and the UK reacted to resolve the issues has helped to calm both communities, if not the markets quite yet.
In the aftermath of a run on the bank’s deposits on March 9, the US Treasury, Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC) took quick and decisive action to shore up confidence in the banking system. After decreeing the bank as systemically important, they announced that all SVB deposits are guaranteed beyond the $250,000 FDIC insurance cap, all deposits will be available from March 13 and that no losses will be borne by the taxpayer. This means that start-ups won’t face a cashflow shortage in the near term and can still pay their staff and bills.
In addition, the Fed has made available a new one-year term lending facility to banks if they need additional cash and liquidity secured on their assets.
The Secretary of the Treasury Janet Yellen emphasised that the banking system “remains resilient and regulators have effective tools to address this type of event”.
The Bank of England also acted swiftly in addressing vulnerabilities at SVB UK, which has been a fully licensed independent subsidiary since August 2022, moving it into insolvency on March 10. And by the end of the weekend, it had arranged for HSBC to acquire SVB’s UK arm for £1.
The collapse of 40-year-old SVB raises important questions among the banking community, namely: what led to this catastrophe and could it have been avoided?
Many point to the confluence of multiple factors that made SVB especially vulnerable: its niche client base in the tech start-up world, the investment boom that the sector experienced during the Covid-19 pandemic leading to sky-high deposits, and then the drying up of decade-long cheap money following the Fed’s rate hikes (the Financial Times does a deep dive into SVB’s perfect storm).
But they also point to SVB’s governance and lack of effective risk management. It has come to light that the bank had been without a chief risk officer for nine months before Kim Olson was appointed in January, at a time when the Fed began aggressively hiking rates and there was turbulence in the venture capital market. This should be a lesson to all banks to review their relevant risk metrics and material exposures, including risk limits and thresholds.
US policy-makers also need to take some responsibility in terms of the lack of oversight of SVB’s operations. To lessen the post-crisis 2010 Dodd-Frank Act, congress passed a law in 2018 that raised the threshold at which banks are deemed systemically important from $50bn in assets to $250bn.
As a result, regional banks with less than $100bn in assets were freed from the Fed’s annual stress testing and enhanced scrutiny, whereas it was up to Fed’s discretion for those with assets of between $100bn and $250bn. According to data from The Banker Database, at end-2018 SVB’s total assets stood at $57.0bn; these more than tripled by the end of 2021, to $211.5bn. But despite being the 16th largest domestic lender in the US, SVB was not deemed a domestic systemically important bank – until now.
Also in 2018, the Fed lowered the amount of common equity Tier 1 capital regional banks were required to hold as a cushion against potential economic and financial shocks.
This should be a lesson to the regulators to think twice about unwinding rules put in place to keep the banking system stable and risky behaviour in check.
Many are saying that the lesson for the tech start-up community is to diversify their banking partners. While the sector has largely welcomed the regulators’ actions as a way to ensure access to funds in the near term, many are expecting longer-term issues as they try to access banking services.
In its 40-year existence, SVB played an important role as financial provider to the “innovation economy”, a sector that was considered unbankable for many incumbent banks. The incumbents historically balked at lending – or even providing bank accounts – to tech start-ups because they are young companies with a high cash burn rate, usually without assets or months of accounts to evidence their cashflow. It is not for lack of trying that tech start-ups haven’t diversified their banking partners.
Hopefully, this situation will begin to change as a result of HSBC taking over SVB UK’s operations and more incumbents will follow suit. In a statement CEO Noel Quinn said that the acquisition “enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally”.
Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight
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