SVB Collapse Is a Time to Show Leadership
In government, events often have a habit of getting in the way of plans. But the insolvency of Silicon Valley Bank UK (SVBUK) – a subsidiary of Silicon Valley Bank (SVB) – is a test of leadership. The government has made all the right noises about the importance of science and tech, and it must act with speed and decisiveness to not only protect the UK tech sector but demonstrate long-term strategic ambitions.
The collapse of SVB in the US precipitated a bank run on 9 and 10 March as investors began to worry that SVB did not have the assets needed to absorb losses that stemmed from rising interest rates. These concerns about the bank's solvency spooked its US customers, who in turn started asking for their deposits back. While SVB UK is an independent subsidiary, concerns about SVB in the US led to similar dynamics playing out in the UK too. Both SVB and SVB UK were shut on Friday 10 March by their respective regulators.
It quickly became clear that the knock-on effect could be significant for the UK tech ecosystem, with estimates suggesting between 30 and 40 per cent of tech startups bank with SVB UK.
The debate has brought back echoes of the financial crisis, with some voices worried about contagion from SVB and the tech sector to other parts of the economy. But the problems at SVB (and Silverlight before it) are relatively unique and unlikely to lead to pressure on the wider financial system.
First, SVB was an unusual bank, with its business model based on having large, uninsured deposits from the tech sector combined with a huge base of loans to the same customer base, making it vulnerable to the dynamics that spark runs. Second, the way in which SVB had structured its financing meant it was uniquely exposed to interest-rate rises. Combined, these factors suggest that, at the moment, the challenge facing regulators is to deal with the failure of SVB and SVB UK as swiftly as possible.
In the US, the Federal Deposit Insurance Corporation (FDIC) typically moves quickly to wind up failed banks. The FDIC resolution process is already working to find banks to take on SVB’s assets and liabilities, making a portion of tech firms’ uninsured deposits available as soon as Monday morning.
The policy responses for the UK government should be similarly muscular, with the aim of protecting depositors rather than shareholders and equity and bond holders. Having looked at options over the weekend, the Treasury has said it is bringing “forward immediate plans to ensure the short term operational and cashflow needs of Silicon Valley Bank UK customers are able to be met,” with Chancellor Jeremy Hunt ruling out a bailout.
Short-term government ownership should not be ruled out as an option, with the focus being on a bail-in, which would ensure taxpayers weren’t footing the bill, while depositors would be protected.
But better options are also on the table. The first – and most compelling – would be facilitating an acquisition and recapitalisation (according to reports as of Sunday night, banks including Barclays and Lloyds have been approached). The underlying assets of SVB UK appear to have value, and the issue with the UK bank was potentially more one of liquidity than capital. If another banking provider or private-equity firm was to come forward, government should be engaging quickly to ensure it can help protect the sector. EDITOR'S NOTE: On Monday morning 13 March, it was announced that HSBC had acquired SVBUK.
Failing a private-sector solution, the second is for the government to follow suit – or even up the ante – on the FDIC’s response. This would mean protecting depositors above the £85,000 that the UK's Bank Insolvency Procedure provides; in the US the FDIC currently protects deposits up to $250,000. It would also mean quickly moving to sell assets to ensure depositors needs can be met. Again, the FDIC has set a precedent with its aim to pay 50 per cent of uninsured deposits by Monday.
The need for speed is critical. More than 200 founders and leaders have written to the government to warn of the impending crunch over the weekend.
But SVB's demise also underlines the need to get the wider ecosystem right. The SVB crisis should be an opportunity for the government to deepen its relationship with the science and tech sectors. Short-term fixes are needed, but this opens up the space for a more fundamental rethink of the role of the state in everything from financial-market regulation and pension reforms to its approach to the public funding of R&D and support for spinouts and startups.
This is one of those moments of truth for government and its ambitions for science and tech. As we wrote in our recent report, A New National Purpose, the future of Britain will depend on a new age of invention and innovation. This future will be at risk if many of our promising startups fail due to events outside their control. The current crisis demands not only an immediate response, but also longer-term thinking to strengthen the UK's tech ecosystem over the long run. Acting now would send a strong message from government that the sector has its support.