London Business School’s Richard Portes provides perspective and insight into the SVB crisis
Barely a week ago the Silicon Valley Bank (SVB) was still viewed as a highly-respected player in the startup technology community, counting thousands of venture capital-backed startups as its customers. But fast forward a short few days and SVB has been beset by regulators and a series of government interventions after a panic-induced bank run.
What has happened to Silicon Valley Bank? What at first seemed like the success of a one-of-a-kind lender, with strong ties to the technology industry, has now turned into a 48-hour scramble with regulators and banks, all desperate to force through a package of emergency measures to quash panic among depositors and prevent contagion in the rest of the banking system.
For some engaged in rescuing SVB, memories may have been evoked of the emergency economic responses to the coronavirus pandemic in 2020, and of the great financial crisis of 2008.
Commenting on the fundamentals of SVB, Professor Portes observed, “It’s a good business, a very good business. And it’s been bought for £1 by HSBC, which is a very good deal indeed, especially if one thinks back to ING’s purchase of Barings Bank back in 1996. Barings proved to a great deal for ING too.”
“The big issue is whether this was a regulatory failure in the UK,” says Portes. “There is certainly evidence of this in the US.”
By Sunday, March 12, the US government announced it would guarantee all deposits held at SVB and by crypto lender Signature Bank, which was also shut down by regulators at the weekend. The Federal Reserve, meanwhile, launched a lending facility that would be available to many other regional banks in order to ensure depositors’ demands could be met.
And by March 13 in the UK, the Prime Minister, Rishi Sunak, the Chancellor of the Exchequer, Jeremy Hunt, and top officials from the Bank of England, had emerge from all-night calls over the fate of the lender. By Monday it was announced that a crisis in Britain’s tech sector had been averted, and that SVB UK had been saved by HSBC, with Europe’s largest bank paying a symbolic £1 for the ailing bank.
But was regulatory failure at the heart of the problem? “The regulatory inadequacy was clear. It was baked in since 2018 when both the Fed and Congress moved to exclude smaller banks, and make them exempt from the stress test and liquidity requirements that the larger banks were forced to undertake,” says Portes.
By the end of 2022, SVB had almost $100m in losses due to valuation declines as well as realised losses when it sold $1bn in Available for Sale (AFS) securities. By Friday (March 10), the rating agencies had downgraded SVB to junk.
“There was bad, bad risk management from inside the bank, but the regulators were also not there. It is very hard to understand that, unless one looks at US politics and the way in the rules changed in 2018 to supposedly favour these smaller banks, although it has proved to be no favour.”