Silicon Valley Bank UK (SVB UK) is entering insolvency, after its parent company collapsed and was taken over by US regulators on Friday. The UK government has said it is “working at pace” on a solution to avoid or minimise damage to some of the UK’s “most promising companies”.
On Sunday morning, HM Treasury Chancellor Jeremy Hunt issued a statement to say the government is “treating this issue as a high priority” with discussions taking place all weekend. He stated that the government is advancing “immediate plans to ensure that Silicon Valley Bank UK customers’ short-term operational and cashflow needs can be met.”
Failure in the US
On 8 March 2023, the Bank announced a loss of approximately $1.8billion from a sale of investments and that it was conducting a capital raise. According to a document from the California Department of Financial Protection and Innovation (DFPI), the Bank was at that time in ‘sound financial condition’.
However on 9 March, investors and depositors initiated withdrawals of $42billion in deposits from the Bank, leaving it with a negative cash balance of approximately $958million.
The California Department of Financial Protection and Innovation (DFPI) took possession of the Bank citing inadequate liquidity and insolvency. It is now under control of the US Federal Deposit Insurance Corporation (FIDC) which is acting as a receiver. This means it will likely liquidate the Bank’s assets to pay back its customers, including depositors and creditors.
Impact on the UK
Following events in the US, the Bank of England (BoE) announced on Friday that it would be placing SVB UK into insolvency on Sunday. The Bank stopped making payments or accepting deposits. SVB UK is a separate corporation from the SVB Financial Group and is regulated in the UK by the Prudential Regulation Authority (PRA), a division of the BoE.
Individual depositors are now able to receive payment of up to £85,000 from the UK’s deposit insurance scheme, following the move.
The government says Silicon Valley Bank has a “limited presence” in the UK, but there is concern over how it may impact on cashflow positions in the short term. There are also questions over whether its failure “could have a significant impact on the liquidity of the tech ecosystem”.
This weekend, meetings have taken place between the Governor of the Bank of England, the Prime Minister Rishi Sunak and the Chancellor Jeremy Hunt.
Economic Secretary Andrew Griffith MP also said he has been “speaking to firms all day affected by the news on Silicon Valley Bank” to discuss the worries that they face. He has also held a meeting with “industry reps”.
Scale of the challenge
The Coalition for a Digital Economy (Coadec) – a UK-based non-profit organisation that supports digital startups – said the government’s reaction is “welcome news and an acknowledgement of the scale of the challenge”. Coadec, which has taken part in a roundtable discussion with tech representatives, said the government is “doing a significant amount of work” on potential solutions to the crisis.
Dom Hallas, executive director of Coadec, said: “There’s been strong Ministerial commitment from DSIT (Department for Science, Innovation and Technology) and HM Treasury including a roundtable discussion with tech sector stakeholders (including myself) – and I’m encouraged by the cross-party support as well.
“Of course, the ticking clock is a huge problem for companies. Right now, the key concerns remain immediate liquidity for companies and functional access to banking services on Monday. We know that there’s a need to come to a solution as soon as possible and we are pressing for one.”
‘Rocky ride’ ahead
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “With companies’ deposits effectively frozen on both sides of the Atlantic, and customers only set to be able to get access, in the short term, to limited insured amounts, the aftershocks will continue across the tech sector next week.
“Forced sales of SVB bond assets could see steep losses realised by its remaining customer base, which could lead to fresh mass lay-offs and even bankruptcies.
“Smaller tech-focused banks are set for a very rocky ride as the loss of confidence widens but still the risks of contagion to the wider banking sector remain limited. Although large retail banks have been sideswiped as investors have re-assessed unrealised losses in their bond portfolios, their revenue streams are much more diverse, with large loans books and retail deposits and, with interest rates being hiked, their net interest margins have risen.
“However, it’s clear that the rapid escalation in rates has taken the sector by surprise and the determination by the Fed to keep raising rates has brought fresh worries. Policymakers will now be monitoring this turn of events very closely, and now may be more likely to tread carefully with further rate rises, to ensure nothing else gets badly broken.”
Challenging time for fintechs
This is a challenging time for the tech industry, even for those companies that have not been directly affected by the recent developments, says Tal Kirschenbaum, CEO and co-founder of Ledge, a no-code payments command centre.
“SVB is widely regarded as one of the bedrocks of the tech world, having contributed significantly to the growth of the tech ecosystem. The situation presents a number of first and second order implications that companies need to be aware of in order to minimise their own risk and exposure.
“Fintech companies, for example, that rely on SVB for their core business and have built their product on top of SVB’s payment rails, using their payment rails to move funds, might face significant limits on their ability to operate.
“This will have ripple effects across the ecosystem, affecting mission-critical services like payroll vendors, accounts payable or accounts receivable automation, working capital solutions, and health insurance vendors.”
Support for startups
Innovate Finance, the UK-based industry body and membership association that represents the UK’s fintech sector, said it is “in constant and regular contact with government and regulators” to ensures its community is supported.
It is hosting a webinar on Monday 13 March at 2pm in collaboration with Hogan Lovells on ‘Implications of the fall of Silicon Valley Bank’. US and UK partners from Hogan Lovells Silicon Valley Bank Task Force will discuss the current and future impact and implications for UK and US fintechs, financial institutions, and other affected industries, and will be available to answer questions.
Coadec has also provided information on how impacted UK startups can get in touch with HM Treasury to provide input on the situation. Additionally, it is posting regular updates on the government’s action on its LinkedIn page.
Odin, which helps investors set up and raise funds on its platform, has shared a list of resources to help impacted startups and investors facing liquidity issues “to find a way forwards”. While law firm Goodwin has published a helpful FAQ for those doing business with the Bank.