It’s a now a week since things got very suddenly very scary for many in the tech founder community. The collapse of Silicon Valley Bank (SVB) happened so fast that, as Gillian Tett explains in the FT, even notable investors such as Peter Thiel got caught out.
As the Guardian reports, the state of the bank – and the likelihood and impact of its demise - became the only topic of conversation at the just-kicked-off SXSW event in Austin, Texas this time last week.
One week later seems like a sensible point to stop, reflect and ask some questions about what happened and what might happen next.
A lesson in carry trades?
In her excellent analysis of events last week, Tett says SVB is an example of what happens when carry trades go wrong, as they inevitably will from time to time. She naturally poses the question about how appropriate it is for a bank to be run on this basis. Her piece is nuanced and balanced, but raises some ugly questions that will need addressing.
By another analysis, the SVB collapse is just another case study of human behaviour and the lack of crowd wisdom on display in the event of a bank run. Everyone knows a panic withdrawal is not the right reaction – logic says it will make things worse – but who can ignore that sinking feeling that not running, while everyone else is, will leave you with your pants down?
Few depositors like to leave money sitting somewhere they don’t trust. Contagion is just that, and most bank runs spiral out of control quickly.The risk of further contagion into the rest of the global banking system has been limited so far, by some swift and heavy interventions in the US and UK, including this huge injection by Wall Street banks into First Republic and the Swiss central bank's $54bn intervention to prop up Credit Suisse. But the risks remains evident.
Should we judge all banks by SVB?
For a community so closely connected and always online as the tech entrepreneur community, there is an added rapidity to how quickly things can escalate. Whatsapp messages sent relating to SVB this time last week must out number even those sent by former heath secretary and celebrity mammal muncher Matt Hancock during the pandemic.
A look at tier 1 capital and the impact on it of unrealised losses on SVB, compared to other US banks, explains a lot (the excellent graph below that does this is from Michael Cembalest in the FT).
Where were the auditors?
Another banking collapse has occurred in very short order after said bank was given a clean bill of health by external auditors. In this case, the report was signed weeks before the bank collapse. The FT reports that KPMG’s US boss told a conference this week that stands by the quality of the firm’s work (what else can he say?). He said that "unpredictable" market events were to blame.
And yes, it’s true that many people felt SVB was a going concern right up until the moment the US authorities decided it wasn’t. Which wasn't that long after most of its depositors had come to the same conclusion. And yes, it may have happened too quickly for an external auditor to ever pick up.
But, but, but. The length of auditor tenure will be raised as a concern (KPMG had audited both SVB and Signature Bank for over 20 years) as will the value of a going concern report.
The fact KPMG signed off without any warning will inevitably raise questions, if not on the quality of this audit (which will have been done to a high standard and is most likely fully compliant with all professional regulations and standards), then certainly on the value of audit in the wider sense.
This was either a bad audit or audits today are bad, in the sense that they fail to offer the protection and reassurance they are intended to provide. At the time of the last banking crisis in 2008, some suggested auditors struggled to raise concerns about banks because to qualify their accounts in any way would undermine trust in the bank, thus in itself becoming a trigger for a potential collapse in confidence and a bank run.
That this remains an unresolved issue is, at best disappointing and at worst scandalous.
What are the long-term implications?
The wider implications for the banking community will only be known in coming weeks and months. The implications for the local Silicon Valley economy will be profound and immediate. The Guardian does a great job of highlighting the impact on everything from California's wineries to social housing schemes across the US. The bank occupied a unique place in the community.
Its progressive and founder-led thinking also made it the go-to place for all kinds of services for both those looking to borrow and deposit money. Tech founders are already railing against the tough preconditions some larger banks are now placing on them.
SVB understood founders like no other banking institution. While it is obvious that this was what fuelled its phenomenal growth, it is less clear at the moment whether it is also what led to its demise. This interesting comment piece, points out that a "cool" bank may by definition be a worry; leading, as it might, to the bank manager not being focused enough on the "dull" stuff like risk management.
Will there be a SVB 2.0?
More positively, it’s not necessarily clear that it is the end of the line for SVB. Even now.
It may be dead in many respects and the old institution – so loved by the tech founder community and wider Silicon Valley economy – will not be coming back. But SVB UK lives on under the auspices of new owner HSBC. And, as PitchBook reports, plenty of founders and some VCs are saying they will stay loyal to what has been dubbed, with some inevitability, SVB 2.0.
The next period will be tense for many founders who had funding connected to SVB.
Helm is a network for scaleup founders worth over £1m and many of our members operate in the tech sector. Any members affected by SVB can get in touch with the team. We have put together a small group to offer each other insights, updates and to share any information we collect.