Regulators race to salvage collapsed Silicon Valley Bank

The race is on to salvage parts of Silicon Valley Bank, which has collapsed unexpectedly.

It marks the largest banking failure since the height of the financial crisis 15 years ago. At the time of its collapse, SVB was the 16th largest bank in the US with around US$200bn in assets.

In the UK, HSBC has this morning acquired the UK arm of the bank for a nominal fee of £1. In 2022, SVB UK recorded a profit before tax of £88mn. It had about £6.7bn’s worth of customer deposits and £5.5bn in loans.

Noel Quinn, CEO of HSBC Group, says: “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.

“We welcome SVB UK’s customers to HSBC and look forward to helping them grow in the UK and around the world. SVB UK customers can continue to bank as usual, safe in the knowledge that their deposits are backed by the strength, safety and security of HSBC. We warmly welcome SVB UK colleagues to HSBC; we are excited to start working with them.”

The UK’s Chancellor of the Exchequer, Jeremy Hunt, adds: “This morning, the government and the Bank of England facilitated a private sale of Silicon Valley Bank UK to HSBC. Deposits will be protected, with no taxpayer support. I said yesterday that we would look after our tech sector, and we have worked urgently to deliver that promise.”

In the US, regulators are scrambling to find potential buyers for SVB’s US business, but Treasury Secretary Janet Yellen has ruled out a government-backed bailout.

How did Silicon Valley Bank collapse?

The suddenness of SVB’s demise has shocked markets, with regulators and governments frantically seeking to protect customer deposits. At the time of its downfall, the bank had operations in eight countries – including the US and Canada, UK, China and India.

On Friday, SVB was closed by the California Department of Financial Protection & Innovation, with the Federal Deposit Insurance Corporation appointed as receiver, as is customary for a bank that is no longer solvent. The FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) to facilitate the resolution of SVB.

SVB had created a ‘hole’ in its finances by investing customer deposits in US government bonds, which would ordinarily be considered safe bets. But climbing interest rates had impacted many of these investments. When customers started drawing on their deposits, SVB was forced to sell the bonds at a loss. There was just 48 hours between SVB publicly revealing it had sold the assets, and the bank collapsing.

What was Silicon Valley Bank?

Silicon Valley Bank (SVB) was founded in 1983 and was headquartered in Santa Clara, California until it was deemed insolvent on 10 March 2023 and placed into the receivership of the Federal Deposit Insurance Corporation (FDIC).

SVB was conceived to serve the banking needs of the rapidly growing Silicon Valley tech community, and as such was extremely popular among tech businesses. For this reason, it described itself as “the bank of the world’s most innovative companies”. At the time of its downfall, it was the 16th largest bank in the US and had around US$200bn in assets in total.

According to LinkedIn, the bank employed over 7,000 people in at least eight different countries. It also regularly positioned itself as a champion for financial technology, publishing a quarterly State of the Markets update that purported to "highlight the latest trends and factors shaping the global innovation economy".

What has the reaction been?

Many of the bank's business customers have been left in an uncertain position by the bank's collapse, with some reporting difficulties in wiring funds in the immediate aftermath.

Charles Fletcher, Partner at Mishcon de Reya, tells affected customers: "The collapse of Silicon Valley Bank – and subsequent rescue of the UK arm by HSBC – has important lessons for any startup. Emerging tech companies are vital for the nation's continued economic prosperity. In our experience, there are simple, practical steps to financial management that businesses can take to minimise the uncertainty and stress many have experienced over the weekend.

"Key actions include keeping corporate accounts with more than one bank, having an emergency funding plan to avoid cashflow squeezes, separating funds from different sources and taking a strategic approach to managing currencies. These should accompany fundamental business planning and management steps, such as a detailed risk register and crisis management protocols."

Carlo Capè, CEO of technology consulting firm BIP, reacted by saying: "The collapse of SVB not only raises concerns about the stability of the global financial system, but also has implications for the European tech sector. The loss of a major player in the venture capital market could result in reduced funding opportunities and increased scrutiny on investment decisions, potentially stifling innovation and growth. As the UK and European tech sector is a key driver of innovation and future growth across the continent in areas like the metaverse, cleantech and AI, it is crucial that we monitor the fallout from SVB and address funding challenges to ensure that our tech companies are able to continue trading and growing."

Nigel Green, CEO of DeVere Group, says: “The authorities will get some stick, especially from the shareholders of SVB investors. The asset value of the bank itself is zero, and there’s no chance of a government bailout for them. But… the Fed, the Treasury and regulators were forced into taking action in order to break the doom loop hitting the banking sector. A failure to act would have to be a dereliction of duty. If they hadn’t given customers access to their deposits from Monday, it would have resulted in a loss of confidence in the banking system, leading to a ‘run on the banks’ which, in turn, would have caused a liquidity crisis in the banking and broader financial system, potentially triggering a full-blown global financial crisis. The authorities couldn’t let this happen.”

Green also says that the collapse raises fresh questions about the Trump administration's deregulation of banks and casts doubt on the Fed continuing with its plan for aggressive interest rate hikes.