What Happened to Silicon Valley Bank? David Blake dblake@arlingclose.com

Rising rates create losses

Well, that escalated quickly. Silicon Valley Bank, a specialist US lender to the tech sector, has slumped from being a highly regarded and rated bank to financial failure within a week. The Bank of England has used its resolution powers to sell Silicon Valley Bank UK Limited, the UK subsidiary, to HSBC UK Bank PLC for just £1.

How did this happen?  The problems appear to stem from the influx of cash SVB received during the pandemic, when interest rates were very low and tech businesses were doing well, with deposits increasing 100% in one year alone. The bank couldn’t lend to their target market, tech start-ups, fast enough so the cash was deployed as investments in longer-term government bonds at low fixed rates. As interest rates increased, two serious problems became apparent. The value of these bonds began falling, while at the same time investors were asking for their money back, so they could reinvest at higher rates.

A run on the bank

In early 2023, Moody’s noted SVB were in danger of being downgraded, due to unrealised losses on the bond portfolio.  SVB responded by attempting to sell bonds to boost liquidity, booking a loss of over $2bn and alerting investors to the financial difficulties at the bank. This prompted a rapid withdrawal of customer deposits at the end of last week, with regulators stepping in.

The swift response of regulators, utilising legislation introduced following the global financial crisis of 2008, will provide some comfort to financial market. The Bank of England’s actions allow SVB UK to continue to trade, with HSBC well placed to provide the capital and liquidity required by the bank. In the US, the government has pledged support that fully protects depositors, but state no losses will be borne by the taxpayer, instead “shareholders and certain unsecured debtholders” will be on the hook.

A close shave for investors

However, the rapid demise of SVB is unsettling. The bank moved from a Moody’s senior unsecured rating of “Aa3” (high quality, low risk) on Wednesday morning to “C” (typically in default) on Friday evening, highlighting the risk of relying solely on ratings to monitor credit worthiness.  The situation whereby the bank was willing and able to create such a mismatch between short-term customer deposits and long-term fixed rate investments is also worrying.

The importance of sound treasury management strategy

The UK rescue will be a great relief to the hundreds of tech start-ups that bank with SVB UK, where deposits totalled £6.7bn. Commenting on business deposits in SVB UK, Chancellor Jeremy Hunt noted “some of them only had bank accounts with SVB UK”, so were facing an immediate liquidity crisis. These companies will be breathing a huge sigh of relief and rapidly revisiting treasury management policies and strategies regarding counterparty monitoring, credit exposures and liquidity management.

While depositors appear to have escaped this banking failure unscathed it serves as a reminder on the importance of implementing sound treasury management procedures, remaining vigilant and just how quickly banks can fail.

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