SVB: Black swan or first domino?

The collapse of Silicon Valley Bank (SVB) has dominated the last half of this month. We’ll spare you a rehashing of events, but we wanted to share our thinking about what happened and what it means for the tech ecosystem.

Here are some of the best things we listened to and read about it:

• 20VC: SVB: What Happened? – A good summary (from 12 March) of what happened and what happened next, from Jackie Reses and Kris Dickson, CEO and CFO of Lead Bank.
• All-In Podcast E120: Banking crisis and the great VC reset – The besties recap events and discuss solving the global debt problem.
• Silicon Valley Bank is a very American mess – Analyst Dan Davies suggests the SVB collapse was the result of the US’s unique banking culture.

The first domino?

SVB was a casualty of the sudden spike in interest rates. This was a failure in liquidity and risk management, rather than credit risk. But that doesn’t make the risk of contagion any less real.

Earlier this year, the FDIC reported that US banks were sitting on $620 billion of unrealised investment losses from fixed income securities at the end of 2022 – of the sort that contributed to the collapse of SVB. Any further increase in interest rates puts these investments deeper underwater, meaning central banks are walking a tightrope.

Moreover, the fear and uncertainty created by SVB’s collapse has contributed significantly to the risk of contagion.

Take Credit Suisse, brought down not by a liquidity gap, but by panic – following years of mismanagement, scandal, and bad bets. UBS’s last minute, state-backed takeover and central banks’ co-ordinated efforts to enhance market liquidity failed to calm concerns about the health of the global banking sector. And the latest rate hikes only fanned them further.

It creates the potential for more disruptive events in banking globally in the near and medium term, because everyone is on a hair trigger.

Adding to these concerns is the fact that SVB, Signature Bank, and Credit Suisse all received a clean bill of health from auditors and regulators shortly before collapsing. It prompts the question of whether the post-2008 regulations are still fit for purpose, and whether regulators have the right tools – the information, experience, and technology – to supervise the observance of those regulations in an environment with new risks.

In 2008, not everyone had a smartphone, and social media and fintech startups were in their infancy. There was a lot more friction in the system than there is now. The rules were not designed to handle the risk created by an instant, interconnected tech ecosystem.

And it’s not just banks. Higher borrowing costs, slow economic growth, and fewer people working in offices after the pandemic are storing up the potential for a significant property crash. Banks’ bond portfolios caused the fall of SVB, and mortgage portfolios are expected to be hit hard by defaults and non-performing loans. The average interest rate on a two-year loan is 6%, and four million households in the UK will face higher monthly mortgage bills this year. Whatever shape it takes, it’s clear that higher interest rates will cause havoc across an industry struggling to adapt to the new macro environment.

Building the next generation

To some extent, this market turmoil is a necessary reckoning. Banks and businesses that have not performed, or simply made bad bets, are paying the price. It should result in a fitter economy.

The way out of this is cash management and sustainable growth. That’s as true for banks as it is for startups – and governments. Early-stage companies in particular need to rethink how they operate. If SVB and co are the result of – and a contributory factor in – a wider market reset or phase of instability, with higher costs and lower availability of cash, we all need to think like an SVB (with the benefit of hindsight) and keep a close eye on liquidity risk. VCs will have a big part to play in advising their portfolio on this risk, and helping them find the right talent to see that it’s managed effectively.

But it is in the most challenging environments that the best businesses prove themselves. Some of the most innovative and ambitious founders are emerging right now. And those who can succeed in this environment will come out the other side even more formidable. These are times to focus on delivering as both investors and founders.

That’s why SVB was so important. It was the banker to innovation.

Capital fuels the tech ecosystem, and if that slows down, we can’t be as effective and competitive as a community. Having banking partners that understand the unique circumstances of the ecosystem and empathise with the entrepreneur’s journey is vital. Hopefully, SVB UK under HSBC, and whoever eventually acquires SVB US, will continue to operate in that capacity.

Ultimately, this is a call for more SVBs – in an environment, and with controls, that ensure stability – to fuel the next generation of founders.