A few days ago, I started writing a piece for Liberal Democrat Voice about the creation of the new Department of Science, Innovation and Technology and what it might mean for the entrepreneurial science-based economy. I was going to look at financing of science-based companies and how it could be improved. The news of the collapse of the Silicon Valley Bank (SVB) on Friday came as the piece was almost finished and has overtaken some of my conclusions in that article.
It’s likely that most Liberal Democrats will never have actually heard of the SVB until this weekend. As its name states, the bank emerged in the past forty years in the heart of California’s Silicon Valley and has been a major player in the West Coast technology scene as the bank of choice for venture capital companies and their investments [a side note: it’s also the bank of choice for the Californian wine industry]. Its European operations only started a few years ago with the opening of a full office in London with the intention of expanding to Europe. The bank’s aim was to enable its US-based customers to expand to Europe as well as supporting European tech companies to move to the US. These plans are now on hold as the bank has just announced, as I write, that it will be placed into insolvency.
The bank is unusual compared to the more traditional banking outfits. Venture-backed companies tend to have little income – at least in the early years – and rely on being bankrolled by venture capital funds who supply funds in tranches. These funds are placed essentially in deposit accounts at the bank and drawn on to pay salaries, office overheads, and other outgoings. SVB had used these deposited funds to buy bonds – and as interest rates have soared, the value of the bonds has gone down, leading ultimately to the current cash crisis when companies started trying to withdraw their money.
The effect in the UK is currently unclear, as I write. Deposits are only guaranteed up to £85,000 which means that some companies with their funds in the bank will have a major issue (reports stating funds are secured up to £250,000 are incorrect, as this applies only to deposit insurance with the US bank). The aggressive expansion of the bank in the London tech scene in the past few years will probably mean that some companies are badly exposed and may themselves have to file for insolvency as the lack of funds will mean that they are no longer “going concerns”. In other cases, services offered by companies may simply no longer exist next week with the fate of customer’s monies being uncertain. GoCardless, for example, used by many LibDem organizations is also listed as a client of SVB.
Fortunately in the UK, many startup firms use the more traditional banks and whereas these may have taken a hit on the value of their shareholdings, the regulations introduced since the global financial crisis and the regular stress tests conducted by the Bank of England will hopefully mean that any fallout is limited.
However, the real challenge will come in the fundamental issue facing the UK. How do we fund science-based businesses to create real long-term value and prosperity? The collapse of the bank removes an innovative and major player for financing startups, and it will be missed. But that is going to be the subject of another piece…
* Robert Harrison is Chair of the Liberal Democrat European Group and former Chair of the LibDems in Europe Local Party. He also holds German nationality and was a candidate for the European Parliament for the FDP in 2024.
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
The Charge of the Light Brigade - A perfect analogy for the United Kingdom today
Lib Dems miss out by 4 votes in council by-election
New lunchtime concerts for 2025
A looming trade war?
Only 3 historical inaccuracies
Rare 1950s film of Thomas Cubitt's stuccoed streets in Pimlico
David Raw
Mark Frankel
Peter Martin
David Murray
12 Comments
From my reading of the Financial Times, there is nothing complicated about the collapse of SVB.
It had lots of deposits which it used to buy relatively long-dated government bonds. When interest rates rose, it faced big losses on the bonds. In turn, that led depositors to worry about the bank’s solvency and withdraw their funds. That of course led to a bank run.
Avoiding excessive interest rate mismatches between assets and liabilities is something bankers are taught on day one. This was a simple case of the bank choosing to ignore such common sense in the pursuit of higher earnings, and the regulators letting them do it until the collapse came once interest rates rose.
“This was a simple case of the bank choosing to ignore such common sense in the pursuit of higher earnings, and the regulators letting them do it until the collapse came once interest rates rose.”
Wasn’t it ‘light touch regulation’ which got banks into so much trouble before?
This article has been overtaken by events…
‘HSBC to buy Silicon Valley Bank UK for £1 in rescue deal’:
https://www.theguardian.com/business/2023/mar/13/hsbc-buy-silicon-valley-banks-uk-tech-startups
‘HSBC has finally done something for Britain rather than China’:
https://www.telegraph.co.uk/business/2023/03/13/hsbc-has-finally-done-something-britain-rather-china/
Yes. HSBC ‘got it for a song.’Let us hope that they control it wisely and China does not become involved.
I’m not sure why Jeff is boosting the role of Rishi Sunak. Having watched the BBC business news this morning, it’s clear that all the preliminary hard work over the weekend was done by my old friend Michael Moore, the former Lib Dem MP for the Borders. Good to see Michael giving such an excellent interview on the programme.
“there is nothing complicated about the collapse of SVB……..”
Very likely there isn’t. However, the same thing would have been said some 15 years, or so, ago about the collapse of Northern Rock, Enron, Lehman Bos etc. It’s easy to be wise after the event.
In any financial crisis the worst run organisations will always collapse first. Bad debt will always create more bad debt. The excessive use of monetary policy, ie interest rate variations, to regulate the economy will always have the effect of creating too much private debt when rates are reduced to stimulate the economy. The raising of rates, to slow it down, converts too much private debt into too much bad private debt with the consequences we saw in 2008 and are in danger of seeing again now.
The current US housing bubble is one to watch. If that bursts then we can expect ours to do the same.
One of the challenges about writing an article on a moving topic is that the situation changes rapidly – it was announced on Monday morning that HSBC was going to take over the UK assets of the bank. Excellent news for the British tech sectors who had been facing serious difficulties had the bank not been rescued. I had not appreciated that Michael Moore had been so involved in the plan. Good on him for picking up the pieces.
SVB had been heavily engaged in lobbying to lighten bank regulation in the US and was not one of the banks that the US authorities monitored, as its balance sheet was too small. Its failure shows, however, that there are inherent risks in the financial system even from smaller players.
The European financial system has been massively strengthened since 2008. However, the government has (had?) been planning to lighten the burden of regulation on smaller banks – any such moves need to be considered carefully.
The collapse of the SVB will not help, however, in encouraging more finance to the tech sectors. We shall need as Liberal Democrats to think hard and carefully about the role that the government can and should play in providing finance to this growing sector.
I find it interesting people have seemingly overlooked the cause of the failure, namely the substantive increases in Bank rate by central banks and the knock on effect on government bonds and their current market value.
It would seem the problems SVB encountered bear many similarities to the problems UK pension funds found themselves in and requiring urgent government intervention to avoid falling foul of government set asset/liability ratios.
I’m not sure if the problem is the result of a “worst run organisation”, or simply a risk with smaller banks without both the substantive assets and diverse operations of the majors such as HSBC. But clearly there is a systemic regularly issue in the banking and investment market.
One bright point about recent events (other than the speed of intervention and the involvement of LibDem Michael Moore), is that it wa possible to ring fence the UK operation(it seems similar is being applied to SVBs other oversea operations), so as to protect UK customers from having their deposits used to benefit the USA operation…
@ Mohammad,
” When interest rates rose, it faced big losses on the bonds…………………………the collapse came once interest rates rose.”
Interest rates don’t just rise on their own. Someone, in government or the central bank, has to choose to increase them. So are the problems in the financial sector, which aren’t limited to SVB, caused by those who hold bonds or by those who decide to increase interest rates?
Why have bonds in any case? If banks need somewhere to park their spare cash why not use the reserve accounts which are provided by central banks? Associated interest rates can then be adjusted without affecting the size of their deposits which is, in effect, what happens with the bond saving system.
Two factors: a slowdown in venture capital funding in the tech sector and rising interest rates.
Faced with limited ability to raise new capital, some of the bank’s customers had to tap into their deposits to meet their obligations. At the same time, the bank was using those deposits to invest in bonds.
Amid the current trend of rising interest rates, the bonds the banks had invested in were paying less than bonds issued more recently. As customers made demands for their money, the bank had to unload its bond investments at a loss.
https://worldabcnews.com/the-collapse-of-silicon-valley-bank-what-does-it-mean/
Borrowing short and lending long is one of the classic causes of banking catastrophe, especially when in times of artificially low interest rates.
When I worked in America in the 1980s, the darling of the investment community was a boutique investment firm run by Michael Milken that went by the name of Drexel, Burnham, Lambert. They specialised in the market for high-yield bonds (“junk bonds”). Silverado bank in Colorado was one such institution that paid high rates of interest to depositors and invested in these high yielding bonds to make a profit margin.
Milken’s firm grew very large and was financing big leveraged buy-out firms such as Kohlberg Kravis Roberts and many of the so-called “greenmailers of the time. These high yield bonds were called “junk bonds” for a reason. Many US Savings and loans invested savers money in the instruments as well as speculative commercial real estate. When the inevitable economic downturn came a Savings and loan crisis and government bailout ensued.
This is the world of high finance. The same mistakes are repeated over and over. In the recent climate of ultra-low bond yields, financial institutions have been making big gains betting on ever lower real interest rates. When the music stops someone is going to be left holding the bag. That someone is most commonly the taxpaying public.