On Friday 10th March, Silicon Valley Bank (SVB) was closed by California regulators. SVB was short on cash and reacted by selling bonds at high losses which sent the wrong signal to investors and customers. The outcome was a $1.8bn loss on the sale of SVB Financial Group’s bond portfolio, amounting to a 60 per cent slump in share value. With only a fraction of deposits protected and a number of UK tech businesses with assets tied up in the bank, the UK is working on rapid solutions.
A significant event
SVB was the 16th largest bank in the United Stated, headquartered in Santa Clara, California. Since the 1980s, SVB has been a significant tech specialist in the global economy. In particular, SVB are a keen supporter of early-stage tech startups, offering opportunities to nascent businesses that wouldn’t be seen among larger, corporate banks.
By the time of its collapse, the UK arm of SVB held almost £7bn in deposits, serving between a third and a half of the UK’s innovation economy. This spooked UK businesses and policymakers since the collapse of SVB posed an existential threat to the UK tech, science and innovation sectors. The knock-on impact of SVB’s collapse has been a 3.8 per cent fall, amounting to losses of £29.6bn, from the Stoxx Europe 600 banks index market value, an index that includes British lenders.
On a global scale, the collapse of SVB marks the greatest lender failure since the Lehman Brothers collapsed in 2008, sparking a global recession. Almost £30bn has been wiped from the value of UK and European lenders following SVB’s collapse and the aftermath has caused a slump across the UK banking sector, including a 4.6 per cent slump for HSBC, 4.5 per cent loss for Standard Chartered, Barclays is down by 3.7 per cent and Lloyds is out by 3.3 per cent.
The UK responds
Following Friday’s collapse, over 250 UK tech firm CEOs signed a letter to Jeremy Hunt calling for intervention. The Bank of England announced on Sunday that the UK arm of SVB would be put into insolvency, allowing depositors to be paid up to £85,000 from the deposit insurance scheme. This has provided cover for UK tech firms who will not experience the same level of damage as US tech firms reliant on SVB.
HSBC has agreed to purchase the UK arm of SVB in a bid to provide UK tech firms with some much-needed relief. This support will mean UK businesses with money tied up with SVB will be able to access their funds and banking services as normal. HSBC announced that the deal did not involve taxpayer money and the UK arm of SVB was purchased for £1.
Venture capitalists are usually a funding solution for early-stage UK businesses seeking a cash injection, but a number of UK tech investors are struggling to access their funds which are held with a collapsing partner: Silicon Valley Bank.
‘Tech sector companies are not cashflow-positive’
While UK tech businesses are feeling some relief from the intervention of UK government and banks, a statement issued by the Bank of England states “the government recognises that tech sector companies are often not cashflow-positive as they grow, and that they rely on cash on deposits to cover their day-to-day costs.”
The Bank of England has also added that “SVBUK has limited presence in the UK and no critical functions supporting the financial system. In the interim, the firm will stop making payments or accepting deposits.”
In the meantime, a number of UK tech firms will be running their numbers to figure out whether or not they are technically insolvent. As the UK government and banks scramble to rescue UK tech firms with a high amount of cash held in SVB, tech firms will be acting far more cautiously over the coming months.
