Amidst Silicon Valley Bank collapse, what is the aftermath?

By Puja Sharma

Silicon Valley Bank UK arm is set for insolvency process sparking fresh alarm–

• Bank of England set to put the UK arm of Silicon Valley Bank into a Bank Insolvency Procedure.
• Customers will receive £85,000 per account, or up to £170,000 for joint accounts, from the deposit insurance scheme, while the remaining assets would be managed by liquidators.
• Development comes after the parent company collapsed and was taken over by US regulators on Friday.

Silicon Valley Bank shut down on Friday in what was a shocking development for the financial world. This is considered to be the largest bank failure since Washington Mutual collapsed more than a decade ago. In a statement, US Treasury secretary Janet Yellen said that the Biden administration will not bail out the closed bank, but is working to help depositors concerned about their money.

The UK Prime Minister Rishi Sunak stressed that there was no ‘systemic contagion risk’ to Britain’s financial system despite fears over the shocking failure of a major US bank. Sunak in a public statement said, he understood “the anxiety and the concerns customers of the bank have”. He and the government were “making sure we can work to find a solution that secures people’s operational liquidity and cash flow needs”, he said.

“SVB failure was largely the result of a concentrated customer base serving tech companies. These companies, struggling to raise funding have been withdrawing funds from the bank to meet their capital requirements. SVB was forced to sell $20bn of securities at a loss to fulfill withdrawal requests. Those sales and comments from the bank eroded confidence and caused a bank run – $42bn was withdrawn in a single day. SVB was unable to meet all withdrawal requests. Last Friday, FDIC – The US bank regulator stepped in and declared the bank insolvent and took control.”

SVB was a big lender in the crypto industry, David Lavecky, the CEO of CANVAS Digital said, “When the markets re-open on Monday and in the coming weeks, we’ll be able to see the knock-on effects from the collapse of Silicon Valley Bank (SVB), across other banks, financial markets and the tech community globally,” he said.

With companies’ deposits effectively frozen on both sides of the Atlantic, and customers only set to be able to get access, in the short term, to limited insured amounts, the aftershocks will continue across the tech sector next week. Urgent talks regarding potential takeovers will be ongoing, with regulators under pressure to negotiate bail outs to avoid further damaging fall out. Forced sales of SVB bond assets could see steep losses realised by its remaining customer base, which could lead to fresh mass lay-offs and even bankruptcies.

‘It was looking inevitable that the dramatic loss of confidence in SVB would also sweep its UK arm into insolvency.  The run on the US bank spooked customers banking with the British subsidiary, despite protestations that it was ringfenced from its parent. Once US regulators stepped in to ground the mothership, attempts to withdraw deposits escalated, putting the bank in a highly precarious position.” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

Smaller tech-focused banks are set for a very rocky ride as the loss of confidence widens but still, the risks of contagion to the wider banking sector remain limited. Although large retail banks have been sideswiped as investors have re-assessed unrealised losses in their bond portfolios, their revenue streams are much more diverse, with large loans books and retail deposits and, with interest rates being hiked, their net interest margins have risen.

Since the financial crisis, banks have had bigger capital ratios and have been forced to build up their buffers to prevent another shock so the prospects for wider insolvency are low. The Bank of England judged in its latest financial stability report that UK banks were sufficiently capitalised and strong enough to deal with the storms of a sharper deterioration in the economic outlook.

“However, it’s clear that the rapid escalation in rates has taken the sector by surprise and the determination by the Fed to keep raising rates has brought fresh worries. Policymakers will now be monitoring this turn of events very closely, and now may be more likely to tread carefully with further rate rises, to ensure nothing else gets badly broken.’’ Streeter added.

To provide cash flow to stressed businesses, Payhawk, the leading spend management solution for domestic and international businesses throughout Europe, the US, and the UK is launching a new emergency Visa credit card for businesses with zero-interest rate and 60 days payment terms available to businesses in the US and UK.

“We are eager to provide this product to businesses in need as we have been monitoring the situation with Silicon Valley Bank since Thursday. It was extremely important for us not to take advantage of the situation and contribute to the bank run on Thursday and Friday, but now that there is a real-risk of cash crunch at businesses on Monday, we wanted to ensure that we can help those businesses given our strong position as a company in the space.” said Hristo Borisov, Co-founder & CEO at Payhawk.

What’s unfolded is significant given so many tech companies held their cash reserves entirely at SVB, with access to those funds now uncertain, many may not be able to meet basic working capital needs like payroll, supplies, and operating expenses. To make matters worse, many founders held their personal accounts at SVB. Deposits are guaranteed up to $250K but amounts beyond that are uncertain and may take weeks or months to be returned. This is a very unfortunate situation.

HSBC Holdings Plc’s ‘ring-fenced subsidiary’ – with help from the Bank of England – has acquired the United Kingdom arm of Silicon Valley Bank for one pound sterling, or around $99. Sky News reports that the deal will not impact HSBC’s global balance sheet, but will sharpen its exposure in its home market.

Speaking on the deal, HSBC Group CEO Noel Quinn said, “This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.”