Silicon Upstart Collapse Blows Holes in Swiss Banking System

By Laura Gilles

Silicon Valley Bank (SVB) has been a leading bank for tech companies and startups since its founding in 1983. The commercial bank was based in Santa Clara, California and its specialty was technology, life sciences, venture capital and private equity financing. The bank’s mission was to provide banking services to this niche group to give them the support they need to grow. The bank gained a reputation rapidly as a leading financial institution as a result of its desire and willingness to take on high-risk loans for companies starting out. This risk-loving behavior clearly paid off in the beginning as some of SVB’s clients consisted of startups like Uber and Airbnb, both of which have become extremely well-known and successful. 

Although SVB seemed to be thriving, that clearly wasn’t the case, as it collapsed suddenly on March 10th, 2023. Before the crash, SVB, although not a household name, was the 16th largest bank in the US and worth more than £200 billion.  So, what happened, and why did such an industry leading bank crash so fast?

There are two main reasons which lead to the collapse: lack of diversification and a classic bank run. The lack of diversification came from the bank’s intense concentration on venture and private equity financing of tech companies and direct financing of tech startups. The chances of this happening would have been significantly less had it been diversified. Therefore, when the tech sector came under pressure, which was largely caused by significant leverage in a world of rising interest rates, their lenders came under pressure. It was clearly visible by the significant fall in their stock prices and mass job losses as they sought to reduce costs and demonstrate to the market that they were responding. As their equity value fell that in turn put pressure on their debt and being so highly exposed to the sector it massively impacted SVB. Being so exposed left the bank vulnerable and at risk of collapse which is what ultimately happened.  Of course, as depositors became aware of the exposure of SVB’s own balance sheet, they themselves started to take action to protect themselves by withdrawing their own funds. This in turn exacerbated the problem which eventually became a self-fulfilling prophecy. The run on the bank was, of course, the final nail in the coffin. 

The specific moment that the bank’s customers became aware of the issue was on March 6th when SVB announced their £1.75 billion capital raising, this in fact triggered the run, but frankly at this point there was little else to be done. Within a day SVB’s stock plummeted 60% and it was clear the customers of the bank were nervous and were actively trying to withdraw all assets and deposits. 

The United States government announced that they would not be bailing SVB out, and so it collapsed. The US government did announce they would protect the depositors and as the bank collapsed it left the bank’s own creditors with only the remaining assets. The equity holders or shareholders became the unsecured creditors and in fact will likely end up with nothing. 

This had a knock-on effect to smaller, regional banks who were similarly exposed and in fact some, such as Signature Bank, have also now collapsed. Signature Bank, similarly to SVB, had a lack of diversification and was highly exposed to crypto. Even larger institutional big banks were affected –in fact, the whole sector has fallen out of favor with investors . 

Officials claim that the UBS takeover over Credit Suisse, which threatened to destabilize the Swiss’ cherished financial services sector and possibly even destabilize the global banking system similar to the 2008 collapse, was not related to SVB. The Swiss Government facilitated the transaction, and officials in Switzerland, Europe and US have been messaging hard that it is unrelated and not contagious. Thus far, their efforts appear to be working. There is little doubt, however, that the SVB run was the catalyst for a whole series of events that includes potentially collapsing the coveted Swiss banking system. The silver lining here seems to be actions of central banks and governments after 2008 to ensure the banks were resilient to such shocks. 

Of course episodes like this expose utterly selfish and questionable behaviors. CEO Greg Becker sold $3.6million in stocks days before the collapse. Although this isn’t technically illegal, it is questionable and undoubtedly will lead to an investigation into the bank’s operations and governance. Greg Becker rightly has also now been removed from the San Francisco Fed’s Board.

At the same time the UK arm of SVB which was bought out by HSBC for £1 paid out £15 million in bonuses to its employees. This has raised eyebrows, but clearly HSBC took the view that it needed to retain critical staff through the transitions. Big bonuses in failed banks – is it so hard to believe? 

If that seems incredulous, KPMG, the bank’s auditors, on February 24th gave them a ‘clean bill of health’. Did the bank deteriorate and unwind this quickly or was the audit quality questionable? Many are inferring that lax auditing measures or unhealthy executive relationships could be to blame and undoubtedly this will be investigated.

Overall, the collapse of SVB is another clear example of the need for diversity – all your eggs in one basket time and again has caused failures and pursuing chaos. In the case of the Swiss banking system, it very nearly blew holes through it whether it was the cause or catalyst. Underlying all of the relatively low level of turmoil gripping the banking sector, is the sky-rocketing levels of inflation which are in turn causing central banks to have to react in the only way they know how by raising interest rates in a world that has grown accustomed to low rates. My view is that for as long as governments are trying to balance inflation with interest rates, and frankly I don’t see they have any other option, there will continue to be pressure on institutional lenders. As a depositor, I will certainly be spreading my assets around to minimize risk.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

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