US tech-focused bank Silicon Valley Bank (SVB) has collapsed, after authorities acted on Friday to freeze withdrawals after a run saw over $40bn (£33bn) in deposits pulled from the bank. This has sent shockwaves through bank stocks in the US and Europe but the longer term impacts will likely be limited to the bank’s clients suddenly cut off from their cash. Many are cash-intensive tech firms that will quickly struggle to operate without ready access to capital.
This deposit-heavy, loan-light model is what contributed to the collapse of the bank.
Most clients held over the protected amount of $250,000, making a significant task of wading through the bank’s over $173bn in deposits. Of this, just over $150bn will not be covered by the Federal Deposit Insurance Corporation Guarantee.
13 March update: Bank shares falter despite SVB rescue measures
Meanwhile, the Bank of England has also acted to wind up Silicon Valley Bank UK, meaning any clients holding over the protected amount of £85,000 will become creditors. But under the BoE's resolution regime, bank customers should still be able to access their cash, according to a 2022 report into the larger institutions' resolution readiness.
SVB UK said it would likely formally go into insolvency on Sunday evening, so may be operating outside this regime. Investors' Chronicle understands customers have so far struggled to transfer money from SVB UK accounts.
“SVB UK has a limited presence in the UK and no critical functions supporting the financial system,” the bank said on Friday. SVB UK reportedly went looking for a short-term loan of £1.8bn before the BoE stepped in.
While there is no systemic risk from the resolution order, it could have a “significant impact on the UK’s tech startup ecosystem”, according to lobby group for the sector Coadec. Individual companies in the UK had started pulling deposits at the end of last week but the bank still held substantial assets before the resolution order came in.
Coadec executive director Dom Hallas said on Saturday he had been in talks with Downing St over “policy options” to support startups suddenly starved of cash.
The equity impact has also been significant, as bank shares in the US and Europe sold off on Thursday and Friday, in response to SVB revealing a capital raise was needed after it had dug itself into a hole by putting significant funds into Treasury bonds.
As deposits slowed down, it had to sell off these bonds at a loss to raise cash, and then cover the loss with a capital raise.
That failed and over $40bn of customer deposits were removed in between the bank revealing the issue and regulators shutting it down. The KBW Nasdaq Bank Index is down over 10 per cent since SVB went public with its woes.
What next?
Previous bank failures in the US have led to buyouts by bigger banks, which then assume responsibility for the deposits - this is ideal as customers get access to their cash again. The BoE guidelines for resolution only apply to the big banks, so SVB UK may not be as ready and insolvency could also be a rougher process for customers. Worry in the sector is reasonable, but it is unlikely to spread beyond the investors and workers at SVB UK client companies.
