The banking sector has once again been put under the microscope following the dramatic collapse of Silicon Valley Bank (SVB). Based in Santa Clara, California the bank’s loan book is heavily weighted towards tech start-ups, and the restrictions placed on the world during the COVID-19 pandemic had led to an upsurge in cash deposits as turnovers escalated. I’d never heard of Zoom or made a grocery purchase from Amazon before March ’20! These vast deposits were then placed into US Government Bonds by SVB for the purposes of capital preservation and return.
In the low interest and low inflation environment that followed the ’08 crash, this could be considered a prudent approach, but the world has changed immeasurably in the last 36-months and the US Federal Reserve’s hawkish approach to the ongoing inflationary pressures has seen US interest rates jump; much as we have seen here in the UK.
Bonds are negatively correlated to interest rates, so the rate rises devalued SVB’s bond portfolio; it’s simple ‘demand and supply’ - why would you take bonds from SVB when they are issuing new bonds with greater returns!?
With the world reopening post “lockdown”, the ongoing capital demands and decreased turnover in the tech sector has led to net withdrawals from SVB’s tech focussed customers. The subsequent bond sale generated the necessary liquidity for the bank (the “motivated” sale raised $21bn), but the portfolio was sold at a reduced value due to the effect of rates. The damage to the balance sheet was significant, c. £1.8bn, and sent shockwaves through their customer base; exacerbated by the clamour on social media and other digital channels, such as WhatsApp. Unsurprisingly, information spreads quickly in this sector!
The reaction of spooked customers was to withdraw their deposits, thus increasing the bank’s cash requirement and calling their wider balance sheet into question – there’s c. $212bn of fixed income securities held by SVB.
The cashflow crisis created by withdrawals and the associated bond encashments eventually sunk the commercial bank; it was the victim of self-fulfilling prophecy.
SVB’s demise was not due to cavalier lending and/or product misselling, and the concentration of the client book is not typical of the wider banking sector. Furthermore, the largest operators in the markets have a more prudent capital adequacy policy and are subject to stricter monitoring.
This sorry tale will dent market sentiment [even more] and there’ll be exposure across the banking and tech sectors here and abroad; however, both the US and UK have moved quickly to mitigate the damage – US regulators have protected deposits and HSBC has bought the UK arm of SVB - and the likelihood of worldwide contagion and a ’08 style banking collapse appears highly unlikely (as at 14th March).
It is worth reminding you that in the event of bank failure the Financial Services Compensation Scheme (FSCS) will protect your deposits up to £85,000. If you hold sums in the bank in excess of this figure you may wish to open an account with another bank, utilise NS&I and/or speak with your financial adviser.
We host a free clinic in the Watermark Centre, Ivybridge on the last Tuesday of the month, please feel free to drop in with any questions.
We strongly believe in the benefits of developing long-lasting relationships with our clients.
We aim to be approachable, easily contactable and offer a broad, inter-discipline, assessment of client needs. We are happy to meet via telephone or virtual meeting, but still prioritise face-to-face meetings where possible.
We work closely across our departments to ensure that specialist knowledge and experience is accessed; when queries arise, there will always be someone available who understands and can deal with your concerns.
We are also keen to work alongside other key stakeholders and individuals; land agents, accountants, your existing solicitor or financial adviser, and of course, your family.
As a firm we are keen to promote and involve ourselves in the community, and to support local charities and initiatives, such as Jeremiah’s Journey, St. Lukes, the Plymouth Argyle Community Trust (Project 35), Emotional Logic and the Ivybridge Brewery.
The South West is a beautiful places to live and we are proud to be based here, we’re therefore keen to help where we can.
Start the process using this form and one of our expert team members will be in touch with you shortly.
