The Garrulous Jay – The Curious Case Of SVB

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When Silicon Valley Bank went bust last weekend something curious happened… A group of leading UK venture capital firms took to LinkedIn with a public proclamation of support for the bank’s UK subsidiary, SVB-UK. They described it as “a trusted and valued partner of the entire innovation ecosystem”. Why so strange? Because the banker ‘villains’ of 2008 appeared to have been recast as the ‘victims’ in 2023.

The LinkedIn statement went on to argue for the bank to be “purchased and appropriately capitalised”, which is of course exactly what happened thanks to HSBC.

But let’s consider an alternative scenario…

Let’s pretend that last Friday the United Agricultural Bank of America* had announced its insolvency. Farmers in the UK claim the bank’s UK branch, with which many of them have their only banking relationship, “is a trusted and valued partner of the entire agricultural ecosystem”.

Might questions not have been asked as to why so many British farmers had decided to bank with the UK subsidiary of an American bank that, until last Friday, most of us hadn’t even heard of? Other UK-based banks are available, after all. Would they have received the same level of sympathy and support?

I do not hesitate to say the rescue of SVB-UK is a good thing, and I would fully support the view that the UK technology sector will be vital to the country’s future economic success. But the latter could also be said of our farming or indeed financial services sectors. Yet I sense those in the IT innovation world consider themselves to be deserving of special treatment.

What is not so special though, is the evident failure of risk management on several levels in the case of SVB…

First, and most obviously, the Bank’s own risk controls were not up to scratch. Interesting to note that SVB was completely without a Chief Risk Officer between April last year and this January… Perhaps this is just coincidence, but perhaps not. Either way the bank had a poorly structured balance sheet when interest rates started to rise. But never mind the balance sheet, SVB’s focus on a single business sector for its clients was in and of itself inherently risky.

Secondly, the Garrulous Jay knows not to bury all his acorns under one bush. But it looks like an awful lot of UK tech companies were doing precisely that with their cash. Worse, though, was that so many companies in the same sector were all putting their acorns under the same bush.

Interdependence in any ‘ecosystem’ should build resilience not weakness. In the case of SVB-UK and its clients, though, it looks like the opposite effectively happened.

In the long-term I do not believe the failure of SVB will be shown to be the canary in the coal mine that Bear Stearns was in March 2008. Hopefully, instead, it will serve as a timely reminder of the risk management basics relevant to all banks and all businesses. In this respect there’s nothing special about the technology ecosystem.

*made up name.