The impact of Silicon Valley Bank on the European tech sector

The impact of Silicon Valley Bank on the European tech sector

The Collapse

On Friday 10th of March 2023, the US-based Silicon Valley Bank (SVB) Financial Group was closed by the California Department of Financial Protection and Innovations (DFPI). SVB was a member of the Federal Reserve System (FRS) and had offices operated from thirteen countries and regions across the globe. The regulator DFPI appointed the Federal Deposit Insurance Corporation (FDIC) as receiver for the US part of the business, which put the bank into receivership to dispose of its assets. As of March 13th, all depositors (both insured and uninsured) in the US have had full access to their deposits as part of the FDIC taking control of the business. At the time of its collapse, SVB was the sixteenth-largest bank in the US, and its lending business had predominantly served both established and start-up technology companies.

So, what has led to this situation based on the information presently available for analysis? PAC understands that the circumstances that created the “perfect storm” within the bank started during the global pandemic. The US part of the bank saw a surge in deposits from technology companies whose solutions and services profited from higher demand during the pandemic. During this period, SVB invested a significant amount of the new deposits in US government bonds because they are traditionally considered one of the safest types of investment in the US. However, after investing significant amounts of the bank's cash in US bonds, the problems began when the US Federal Reserve started raising interest rates to combat a soaring rise in inflation due to various economic issues affecting the US. This, in turn, caused the value of US bonds to fall.

In conjunction, the impact of inflation deflated a lot of the success the US technology sector saw during the global pandemic. A broad suppression of demand by consumers and companies impacted a wide range of US-based technology companies, which led to SVB customers needing to draw on their funds to pay their debts and continue operating. This spike in fund withdrawal by SVB’s clients led to the bank needing to sell the US bonds it had bought at a much lower rate to ensure it had the liquidity to support the increased demand. This led to the bank losing significant money from the bond sale, which prompted concerns about its financial health by its clients and within 48 hours, a significant amount of which had withdrawn enough of their funds to cause SVB’s collapse (commonly described as a bank run). Several financial experts have indicated that by the bank investing its short-term deposits into long-term bonds, they exposed themselves to their equity being wiped out should interest rates rise as they did.


The Fallout

The collapse of SVB understandably sent shock waves through the US government and the global banking market. New York-based Signature Bank had its assets seized by US regulators just two days after the collapse of SVB. Signature Bank was a significant lender to the cryptocurrency sector in the US, and its collapse has been reported as the third-largest bank failure in US history.

SVB, despite being the sixteenth largest bank in the US, is considered by industry experts as a mid-tier lender and not one of the major banks in the US, having $209 billion in assets as of December 2022. In comparison, for context, the biggest bank in the US is JPMorgan Chase, and its assets are worth $3.67 trillion. However, unlike the major banks with heavily diversified portfolios, SVB's client base was focused overwhelmingly on US-based start-ups and mid-sized firms across the tech industry that may be considered too risky to lend to by other banks. So, the bank's collapse has significantly impacted the US tech sector, with reports indicating many tech firms scrambling to change banks.

SVB was founded in 1983 and was considered by the US tech industry as the Godfather of Silicon Valley banking. Over the past forty years, SVB expanded its banking services beyond the US into Europe and China. Its reputation for providing banking services, credit lines, and funding focused on high-growth potential companies within the tech sector was well-known and regarded. There is obviously no “good time” for a bank to collapse, but it could not have happened at a worse time for the global tech industry. Since the end of the pandemic, the tech sector, particularly those companies based in the US, has seen increased fragility because of the combination of inflation, rising interest rates, and the geopolitical conflict affecting operating expenses and overheads. These have seen profits evaporate for many tech firms that expanded during the pandemic.

So, the combination of the collapse of SVB and the existing operating fragility being felt across the tech industry is likely, in PAC's opinion, to have ramifications on the tech industry for years to come. PAC considers that this shock to the system of Silicon Valley could have a positive outcome as start-ups will likely need to demonstrate a stronger financial model and strategy over the coming years that focus on profitability and greater financial spending discipline. This could lead to many tech companies needing to perform financial and organisational restructuring in the absence of a bank like SVB being so focused on the dynamics of the tech industry. All of which could lead to tech firm collapses in the short term.


The Impact on Europe

Given the globalised nature of the tech industry, it is sadly no surprise that the collapse of SVB is impacting European tech firms. SVB was popular globally with tech firms because it acted as a venture capitalist, bank, and community network. The bank had invested heavily in numerous European countries, like how it operated in the US. The tech sector across Europe has been impacted by the same economic interest and inflation rate challenges as the US, with mounting losses leading to job cuts and funding shortfalls. For many European tech firms who did business with SVB, this only furthers an already challenging economic outlook for them.

PAC observes that with the loss of SVB, many European firms may now find it harder to gain access to large funds, which SVB provided, which are not common within European countries. The most notable impact in Europe that the SVB collapse had was regarding its London-based subsidiary, which was opened in 2012, and helped start-ups across the region with funding and loans akin to its US business. On March 10th, the Bank of England (BoE) swiftly declared that the UK arm of SVB would enter insolvency, but SVB and HSBC agreed upon a last-minute rescue deal for one pound.

The loss of SVB, in its prior form, will continue to have a big impact on the European and US tech industries because many firms banked with them because of a perception that traditional lenders could not cater to the specific demands of the tech industry. SVB cultivated, arranged, and sponsored networking events in the UK and Europe—activities targeted at the tech community that other banks did not provide. In 2023, like the US, European tech firms are commonly in the process of cost-cutting and head-count reduction, which was occurring even before the collapse of SVB.

PAC will be interested to see if the acquisition of the UK subsidiary of SVB by HSBC will see it continue to be operated in a similar manner focused on the specific needs of the European tech industry, including the networking community, or whether HSBC will apply its approach to banking to SVB client relationships. Irrespective of the unfortunate chain of events that led to SVB’s collapse, PAC believes that the banking and networking services at the heart of the bank's success over the decades should be considered by other banks considering more active support of companies in the tech industry both in the US and Europe. Whilst a greater focus on profitability and financial discipline should be a positive outcome, it is important for the role SVB provided in understanding the tech industry to be replicated by other banks that want to engage deeper with firms in the industry.