Silicon Valley Bank: what really happened and what it means for London

Silicon Valley Bank (ES)
Silicon Valley Bank (ES)

At its best, Twitter can be delightfully hysterical – as in brutally funny, but also comically panicky and over the top.

As Silicon Valley Bank (SVB) - the bank where most tech startups keep their money - became the second biggest banking failure in US history, Twitter was awash with funny one-liners, as well as some wonderfully dodgy bits of analysis.

The William Rees-Mogg award for all-time bad take goes to the person who dementedly argued that SVB went bust because they had a diverse board of directors: “I’m not saying that 12 white men could have avoided this mess, but the company may have been distracted by diversity demands.” Because of course the gents in charge of Enron and Lehman Brothers did an absolutely outstanding job.

And the Russell Brand prize for ludicrous overreaction surely belongs to the guy who tweeted that SVB’s implosion meant “the planet could literally be at stake”, because lots of startups trying to tackle climate change had their money at the bank. I literally split my sides chuckling at that one.

But now that the dust has started to settle on the SVB drama, and Twitter is turning to other globally significant issues (like Carol Vordeman hanging out with Matt Hancock at Cheltenham races), we can take a clear look at what really happened with Silicon Valley Bank, and what it all means for London’s economy.

Silicon Valley Bank UK (Jeff Chiu/AP) (AP)
Silicon Valley Bank UK (Jeff Chiu/AP) (AP)

It’s hard to overstate how big a fixture in the tech world SVB is. At least four in ten UK digital startups and growing businesses banked with SVB UK – and the financial institution also played an outsized role in hosting events and introducing startups to investors and other useful contacts.

The bank was created in 1983 in (where else?) Silicon Valley to cater specifically to digital businesses.

The peculiar features of tech businesses – being loss-making for a long time, plus the way they rapidly drain their bank accounts between investment rounds – meant that traditional banks struggled to provide financial services to digital startups.

SVB stepped into that void, and grew rapidly as the tech sector mushroomed. This growth accelerated massively over the past few years, as central banks recklessly printed money and kept interest rates at historic lows. The global economy became flooded with cheap money, which in turn swelled the coffers of tech investment funds, and led to digital startups being handed massive cheques - which immediately got deposited into SVB.

You’d assume that having lots of deposit cash would be a good thing for a bank, but it does create the problem of what to do with all that wonga.

SVB’s management decided to use the money to buy lots of long-term investments - mostly government loans (known as bonds) and bundles of mortgages.

Locking up funds for the long-term was a major departure for SVB, which had had previously kept the vast majority of its cash in short-term investments - but their management assumed they could get a better rate of return that way.

This proved to be a massive miscalculation, because when central banks started hiking up interest rates, the value of these investments dropped sharply.

Suddenly people started worrying about whether SVB was solvent – and what happened next was the first old-fashioned bank run of the hyper modern digital age.

The downside of having such a concentrated customer base - ie almost entirely tech companies - is that sentiment can spread incredibly fast (especially on social media), and now that you can withdraw money online rather than having to do it in person, banks can run out of cash at an astonishing pace.

Late last week, some US tech investors had advised their startups to pull their cash from the bank - and this quickly snowballed into a crisis.

Joe Biden (Leon Neal/PA) (PA Wire)
Joe Biden (Leon Neal/PA) (PA Wire)

On Thursday alone, SVB’s customers tried to withdraw over £34 billion, meaning that by the end of that day, the bank was almost £800 million in the red. Financial regulators stepped in, and the startups who had money at SVB were suddenly in a dire situation.

In the UK, a maximum of £85,000 in your bank account is protected – so if you’re a startup that’s just raised £1 million of investment, and it was all in an SVB account, you faced losing over 90% of your money. (In the US, deposits are protected up to £205,000.)

As a result, SVB’s collapse had two major knock-on effects. The first was that thousands of British tech companies that banked with SVB were suddenly going to be unable to pay their staff - and most of these businesses would quickly go bust if they couldn’t access their own money. WIth almost a million people working for digital startups in London, that’s a lot of families that were facing an uncertain future.

Some Twitter commentators claimed that this is how capitalism is supposed to work - and that governments shouldn’t take action. But there’s a big difference between the shareholders of SVB, who deserve to be wiped out if they take risks that don’t pay off, and the bank’s customers, who need to be able to trust that their money is safe.

The second knock-on effect of SVB’s implosion was on other banks. If you’re a customer at any other small or mid-sized bank, and you’re seeing what is happening at SVB, you might start withdrawing your cash to make sure you don’t have more than the guaranteed limit in any one account.

Very quickly, the ripple effect of SVB could have spread to other banks – and seen a run on those banks too, with potentially vast consequences for the wider economy.

President Biden was the first to take action, guaranteeing SVB bank deposits in full – ensuring that tech companies could access their cash, and keep operating.

Calls quickly grew for the British government to intervene. Influential London-based tech investor Robin Klein was clear about the stakes: “If the UK government wants a world-class tech sector then it has to act today.”

To their credit, Prime Minister Rishi Sunak, Chancellor Jeremy Hunt and their officials swung into action over the weekend, and quickly announced a deal with HSBC for a full takeover of SVB’s UK banking operations that protected customers’ money without any need for a taxpayer funded bailout.

Startup entrepreneurs and their teams could breathe again, after what had been a hugely stressful few days of not knowing whether their enterprises would survive.

Prominent venture capital investor Danny Rimer spoke for the entire sector, posting on social media: “The relief is palpable.”

Meanwhile fintech entrepreneur Philip Kelvin, co-founder and CEO at business BNPL provider Tranch, hailed the Government’s intervention for preventing “a catastrophic blow to the innovation economy”. “The UK’s innovation economy not only would have collapsed, but future generations would be even more risk adverse to entrepreneurship – a trait the UK needs more than ever,” he said this week.

Politicians don’t usually get much credit for averting a disaster before it happens, but in this case, plaudits came raining in for Sunak and Hunt from across the digital sector.

Brent Hoberman, one of the leaders of the UK tech sector, said that the PM and Chancellor deserved “respect” - and heaped praise on the HSBC deal, which could be a “silver lining” that “drives UK tech success even more”.

With the Tories a long way behind in the polls, time will tell whether they get any electoral credit for doing the right thing. It didn’t work out that way for Gordon Brown, who took decisive action when Northern Rock collapsed in 2007, but nevertheless got booted out of office at the next election.

Still, the Government’s firm and rapid steps to protect London’s important tech economy – and the UK’s – is a timely reminder of the difference that political leadership can make.

And with the SVB crisis now seemingly over, we can all go back to normal. Like laughing at dippy people saying dopey things on Twitter.