On Friday lunchtime I got a text from a friend
“how big do you think this banking crisis is – do you think?”
“What banking crisis?” – was my text back.
A friend was being laid off by Silicon Valley Bank.
I once visited it, it’s a place to go when you’ve raised millions for your start up. It’s a real bank, though you won’t get an address for it if you go on its website. It’s offices are on the corner of Finsbury Square and City Road, I’ll walk past it on my way to Church today. In the summer – people party on the rooftop. I went to a Fintech award ceremony up there.
This is how it positions itself
Here’s Robert Armstrong writing in today’s FT.
The failure of SVB does not herald another 2008, but it does mark the beginning of the breakage phase.
Hair breaks when it gets old and stressed, it can be put right – you need the right shampoo.
So what went wrong?
Silicon Valley Bank (SVB) took in so much money over the period of the pandemic that it did not know what to do with it. The money flooded in from investors seeing the opportunity to make money from technology as the world moved to working on line from home.
It invested in the American equivalent of gilts – “Treasuries”.
Its clients, knowing the value of each basis point of interest on their money demanded SVB paid competitive rates but while its competitor banks had a means to extract more money from their loans, SVB had fixed interest securities that paid one rate and as rates rose, fell in value.
So when the sophisticated clients started getting nervous, SVB had to sell Treasuries at a loss leaving a hole in the Bank’s finances which had to be reported to the Federal Reserve. The Fed stepped in, closed the US bank’s activities and the Silicon Valley Bank’s UK arm was shut by the Bank of England.
Over 200 UK based tech start ups are now facing the existential threat of not being able to meet daily bills as their money is frozen with SVB. They are appealing to the Treasury and to Jeremy Hunt for support.
According to the Financial Times, between them they employ over 10,000 people and have received funding of over £3.5bn from the Venture Capital sector. They say they will get liquidity to continue trading early next week.
On Laura Kuenssberg’s show this morning, Jeremy Hunt promised cashflow support for tech start ups with no access to their funds but would not promise a guarantee that these funds would be protected. There is limited protection for individuals and no protection for companies.
In America , start ups are being offered between 55 and 65% of the face value of uninsured deposits and between 70 and 90% of deposits cockered by the American equivalent of FSCS. Sadly, most of the deposits are uninsured, as looks likely to be the case in the UK.
Something to like? Lessons for start-ups
You might wonder how SVB has attracted so many young dynamic companies to bank with it.
Here’s how an American rate comparison website describes SVB’s offering
..you don’t have to be a tech company to use Silicon Valley Bank — and you don’t have to be wealthy. SVB has packages for startups, venture-backed companies and corporations, but it seems to place particular emphasis on startups. Its website advertises “No One Understands Startups Like We Do,” and the bank manages assets for over half the startups in the country. So, it’s safe to say that startups have found something to like about Silicon Valley Bank.
There is a well trodden path for start ups, using the same sources of finance, banking and operational support. Few start ups operating in the tech space will not have considered SVB.
I was recommended to open an account with SVB for AgeWage. We didn’t – thankfully. But I could and can see the attraction of being part of the scene of young companies that see their sphere of reference stretching from Old Street to Shoreditch.
There are plenty of enterprise banks catering for young businesses in the UK and any business owner will want reassurance on their business models, if relying on them for immediate liquidity.
Lessons for pensions
It is easy for old school thinking to reassert itself with a “told you so”, but when I see who owns SVB, I shudder.
The equity of the bank is owned by the companies pension schemes invest in and the £3.5bn of venture capital funding at risk from SVB’s closure is money that might have been funded by our pension saving. Yesterday I was reporting how the Lord Mayor of London is looking to set up a £50bn fund from a 5% levy on workplace pension pots.
Ironically, SVB has been sunk because of falling gilt prices, a problem that old school pensions know only too well. And it seems that the problem is made worse by such a concentration of start-ups using the bank for the same reason.
The start-ups will have the same story to tell about the value that SVB offered, until it didn’t and once again the problem with the financing of returns is (in retrospect) easily explainable.
This is hugely embarrassing to the Bank of England and to the Government, It happens days before the Budget and offers a political open goal to those who see technology as happy to disrupt when times are good , but needy when they’re not. It does little to enhance the case for the allocation of our pension savings to venture capital or directly to technology start-ups.
But , as Robert Armstrong puts it, this looks like the beginning of the breakage phase, Fortunately, those whose businesses are in the front line of casualties, will have the agility and resilience that drove them to be entrepreneurs.
But there will be many casualties from a “breakage”- nonetheless.
SVB collapsed on Friday evening UK time. The UK media doesn’t yet appreciate the scale of the tsunami heading this way across the Atlantic. It will hit on Monday. Then it will be all over the news. https://t.co/C9R7HTcR6a
— Frances ‘Cassandra’ Coppola (@Frances_Coppola) March 11, 2023