How is it possible for a bank to collapse because it holds too many customer deposits – rather than too few, or too many bad loans? That was the mystery of the sudden failure of Silicon Valley Bank, America’s 16th largest, which had seen its cash holdings double to almost $200 billion during the pandemic period because its customers, mostly high-growth tech companies, were awash with venture capital funding that they could not immediately spend.
So they deposited it with SVB, which in turn invested a large portion in illiquid long-term fixed-rate mortgage bonds offering the highest yield available from a meagre range of choices. But as interest rates rose the value of those bonds plunged, and as word spread via social media that SVB had lost the equivalent of its entire capital, customers withdrew $42 billion in a day and sent the bank to perdition.
A special case perhaps – but that’s not how stock-market investors saw it. Bank shares tumbled across the world despite instant comfort for US depositors from President Joe Biden and an impressively swift rescue of SVB’s UK arm by HSBC, intermediated by the Treasury and the Bank of England. What’s most worrying is that this
is the second time rising official interest rates have caused serious unforeseen disruption, the first being the threatened collapse of UK pension funds after Kwasi Kwarteng’s mini-Budget.
Rate rises may now pause. But the point is that current circumstances have no precedent: we’ve never before emerged from a long period of ultra-cheap money, so we really don’t know what the ultimate consequences might be. And in previous moments of potential mayhem, we didn’t have social media to spread rumour and misinformation so instantaneously.
Though other small banks with tech (and crypto) customers may turn out to be vulnerable, there’s no reason to expect major contagion from SVB. But that’s no reason to expect investors and depositors to have calmed down again by next weekend.
Not too posh after all
The realities of the SVB crisis were made plain by two emails at the weekend. The first was from a software entrepreneur whose business, a former finalist in our Economic Innovator Awards, funds itself by collecting upfront payments from clients in the healthcare sector. ‘For the last few years we’ve banked with SVB as a more suitable banker for tech entrepreneurs, having had a dire experience with HSBC before then,’ he wrote. ‘Sadly we now find ourselves massively exposed [with] around £1 million on deposit… I fear the worst.’ ‘Back with HSBC, I see,’ I said on Monday. ‘Having stared briefly into the abyss, I’ll take any bank,’ he replied. ‘Massive relief.’
The idea that old-fashioned UK banks offer dire service, or no service at all, to tech start-ups with hot prospects has been reported as a main reason why SVB had attracted 3,500 UK customers in that sphere – and indeed as a reason why our best entrepreneurs often despair of success on home soil and migrate to America instead. Word-of-mouth in tech communities must certainly have brought business to SVB and I suspect the name itself was also a selling point: in any pitch for venture capital, ‘Our bankers are based in Silicon Valley’ was always going to sound good.
But my second email offered a sharp contrast. It was from another innovative venture, one in which I happen to be a small shareholder, and it was a message of reassurance: ‘We ended our banking relationship with SVB in 2021.’ I asked why. ‘They clearly didn’t understand our business… They were unhelpful as a channel of government loan help during Covid, they wouldn’t consider debt financing… and their platform was awful to use.’
So where did this company move its accounts? The answer was to Coutts – the 1692-founded and formerly frock-coated posh people’s bank in the Strand (now a NatWest subsidiary) that turns out to have a sophisticated offering for entrepreneurs with an eye on managing their fortunes if and when they sell their businesses. So let’s not be too down on old-fashioned British banking.
Talking dough
I’m on sabbatical from the amateur stage in order to focus on speaking work, which comes in all shapes and sizes. Lately I’ve done careers in journalism for sixth-formers (‘More fun than having a job’) and ‘protecting your wealth in turbulent times’ for would-be retirees. My message on the latter is relatively simple.
Don’t expect fund managers to outperform markets, just pick the ones who look least likely to lose your capital. Do take every tax advantage available, including your annual Isa allowance and the Chancellor’s offerings in this week’s Spring Statement. Don’t gamble on crypto or other excitements with more than the slim slice of cash you can easily afford to lose. While inflation’s roaring, do keep a specially tight grip on your costs (I’ve said it before: metaphorically and actually reprogram your boiler). And don’t panic when a black swan like the SVB collapse hoves into sight – for it will surely pass.
This week’s top gig was in Cambridge, talking about whether all the ills of modern finance can be traced to 1980s market reforms: is today’s febrile mistrust of financial institutions, so evident in investor reactions to SVB’s fall, the result of the volatility, complexity, misreading of risk, mis-selling of products and displays of greed that all seemed to have started with the City’s Big Bang?
A hard case to prove given everything that happened in the intervening years. But it provoked a lively debate – and at least the visit gave me an opportunity to pursue my quest for the £30 three-course set lunch. I found one at Parker’s Tavern, a haven of calm for a day of turbulence; but they spoilt it by charging £5.50 for a sourdough loaf the size of a melon when all I wanted was a slice of bread with my starter salad. And I didn’t even have time to feed it to the ducks on the Cam.
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