SVB logo close-up on sign.

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The world became addicted to free money, but now the party is over; what does this say about the health of the broader financial system, asks Anita Hawser.

Markets were still digesting the fallout from the failure of Silicon Valley Bank — the second-biggest bank failure in US history, and the largest collapse since the 2008 financial crisis, which was quickly followed by the collapse of New York’s Signature Bank — when suddenly what seemed like just a problem with a handful of US mid-sized banks, spilled over into Europe’s safe and seemingly robust banking system. 

On Wednesday, five days after regulators and the Federal Deposit Insurance Corporation shuttered Santa Clara-based Silicon Valley Bank (SVB) and later New York’s Signature Bank, Switzerland’s Credit Suisse was in trouble with its shares plummeting by 30%. The Swiss central bank had to provide the troubled investment bank with a $54bn lifeline to shore up liquidity after a Saudi investor said they would not provide the bank with any more funding. 

Many will be left wondering if it is just a Credit Suisse problem or a hangover from the events that had played out with the collapse of the US’s 16th largest commercial bank. Paul Ford, CEO at Acin, an operational risk specialist, believes the SVB collapse is a time for reflection for the financial services industry. “It’s a chance for firms to learn from the market and peers, and evaluate the effectiveness of their risk management frameworks.”                         

Damian Handzy, managing director for performance, analytics and risk at investment management specialist Confluence, says the events of the past few days raise questions about the health of the broader financial system. “In the past 10 to 15 years, the world has become addicted to free money. Everyone, including banks, took advantage of it. But now with the rapid rise in interest rates, it would be surprising if we didn’t have some fall out.

“The party is over. We all drank a lot and had a good time, but some of us are going to wake up with a really bad hangover.” 

Lax regulations

Mr Handzy says when the Fed started to hike interest rates, some of the largest and most profitable growth companies in the world became very sensitive to interest rate rises. As SVB discovered to its own detriment, bonds with longer maturities are more susceptible to interest rate risk. In the days leading up to its collapse, the bank had launched a capital raise to plug a $2bn hole in its balance sheet caused by a substantial loss the bank made on long-dated US Treasuries, which lost a lot of their value as interest rates rose. “A 1% rise in interest rates for US government securities with a duration of eight or nine years means an 8% or 9% decline in the value of those securities,” Mr Handzy explains. “You have to hedge that risk, which SVB seemingly didn’t.”  

If SVB’s long-dated bonds, which were held by its asset management arm, had been subject to the multi-dimensional stress tests imposed on US money market funds, which requires them to stress test their portfolios against three dimensions — rises or falls in interest rates, credit spreads and liquidity — the banks would have soon discovered there was a problem, says Mr Handzy.

But is this just a problem unique to SVB? Mr Handy says he’d be surprised if it was, and doubts that this is the end of the story. 

European banks may have a much bigger liquidity cushion and are more heavily regulated than their US counterparts, but Mr Handzy says the Bank Term Funding Programme set up by US regulators in response to SVB and Signature Bank’s collapse was quite clever. “It changes the dynamic of fixed-income trading. Until this weekend, when you bought US government bonds you had to hold them to maturity. They might drop in value, but at maturity you got back the face value. The problem for SVB was that they needed the liquidity now, not in 10 years when the bond matured. But now the US government says you can borrow against the bonds valued at par, which completely changes the risk and reward of bond trading. There’s no longer any interest-rate risk in holding US government debt for banks that are deemed systemically vital.

“We learned a lot out of the global financial crash (GFC) — multi-dimensional stress testing,” says Mr Handzy. “But not everybody is doing that. Hopefully SVB is the 0.1% that fails spectacularly, but it’s a reminder that good risk management practices are insurance. If you don’t have robust risk management procedures in place, it’s not going to help when times are more difficult.”

Marco Troiano, head of financial institutions at Scope Ratings, questions how SVB’s collapse could have happened given the lessons learned following the 2008 global financial crisis. He points the finger at lax regulations in the US, compared to the EU. “US authorities deserve praise for the swift resolution of the crisis; less so for failing to prevent it,” he says. “SVB was a large bank, with over $200bn in assets, hardly an afterthought for regulators. We are not impressed, considering the post-GFC regulatory architecture.”

He paints a picture of two very different regulatory regimes on opposite sides of the pond. “The EU’s robust regulatory and supervisory framework is stricter than its US counterpart and captures a far greater number of banks by size, compared to the more piecemeal situation in the US where bank regulation is shared between federal and state agencies and where oversight of smaller banks is far less scrutinised,” he notes. 

A “critical difference between the European and US systems,” Moody’s explains, “which it says will limit the impact across the Atlantic, is that European banks’ bond holdings are lower and their deposits more stable, having grown less rapidly.” All EU banks are subject to liquidity coverage ratio requirements and have strong cash balances at central banks totalling 16% of assets, says Moody’s, which means European banks are less likely to require recourse to selling securities and realising any losses.

High levels of uninsured deposits: a cost of doing business with tech start-ups

One of the other aspects to come out of SVB and Signature Bank’s collapse is the high levels of uninsured deposits both banks sustained. According to S&P Global Market Intelligence data as of year-end 2022, SVP ranked second among banks with more than $50bn in assets, with 93.9% of its total domestic deposits being uninsured, while Signature Bank ranked fourth. Huge deposits were built-up during the Covid-19 pandemic, but for the thousands of tech companies (including fintechs) SVB served, which made up more than half of its deposits, according to analysis by CB Insights, there were few other choices to park their deposits.

Will Rhind, founder and CEO of investment fintech GraniteShares, was a customer of SVB UK, its fully licensed independent subsidiary that was made insolvent by the Bank of England following SVB’s collapse in the US and later sold to HSBC. He says a lot of armchair critics question why SVB’s depositors did not have multiple bank accounts. “Different bank accounts; that’s just fantasy when you’re an entrepreneur,” he explains. “Running a start-up company, it’s hard enough to get one bank to have a relationship with, let alone multiple. Part of the reason we used SVB in the first place is that they catered to start-ups whereas traditional banks didn’t.” 

According to Mr Rhind, one of the legacies of the last financial crisis was that banks did not want to deal with any financial services businesses. “Going to a traditional bank and saying we want to open a bank account, they would ask what business are you in. And when we said financial services, they would say forget about it. We do have other accounts here in the US, but in the UK we had no other option.” 

He adds that SVB had a lot of uninsured deposits as a result of its business model. Its main product was venture debt, he says, lending money to start-up companies in return for some warrants and exclusivity of banking relationships. “It was one of the few banks that lent money to start-ups as part of a funding round which provided great value. It allowed start-ups to obtain non-dilutive financing, which is very attractive for any start-up.”

SVB UK was GraniteShares’s primary operating account and the amount it held in the account with SVB UK was over the insured deposit limit, which Mr Rhind explains is just the nature of doing business in a fast-growing fintech. “It doesn’t take long as a company before you’re doing a $4m or $5m turnover a year, so you’re going to be running half a million every month through the accounts.”

Mr Rhind says he started to become concerned about the bank when he saw its share price tanking on March 9. He initiated a transfer to withdraw all the funds it held at SVB UK, but then on Friday, March 10, the Bank of England moved to place the UK bank into insolvency after it applied for £1.8bn of liquidity as its US parent company was collapsing. 

He then had to spend the weekend nervously waiting and wondering if the funds he had transferred from SVB UK would arrive. The transfer eventually went through on Monday March 13. By that time, SVB UK, had a new owner, HSBC, who bought the bank for the princely sum of £1.

“I have to hope that HSBC really wanted to buy SVB’s business rather than regulators forcing it upon them,” says Mr Rhind. “SVB really carved out a niche in the market.”


Watch The Banker’s Europe Editor Anita Hawser comment on the SVP drama on a special edition of The Banker Midweek podcast, broadcast on LinkedIn Live on March 15.



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