When Banks Go Bad

Posted on the 17th March 2023 by Hamish Anderson in Business, Founders' blog, Founder Insights

A week ago today, the first stories of big trouble at Silicon Valley Bank (SVB) were hitting the newsdesks. As befits the zeitgeist, rumours spread by social media of balance sheet inadequacies at America's 17th largest bank led to a rush to withdraw deposits and falling stock markets. Would the issues affecting a specific institution lead to market contagion and put other banks at risk? Bankers and entrepreneurs went into the weekend with trepidation and concern. 

In this article, I intend to consider not the whys and wherefores leading to the collapse of the SVB (there have been millions of words devoted to this already) but rather how a financial firm of a significantly smaller scale reacts to the situation - what goes on behind the scenes at Money Mover.

Our exposure

As a business operating outside the US and with no US clients, our main concern was with Silicon Valley Bank UK Limited (SVBUK), the British subsidiary of SVB. The Bank of England put SVBUK into insolvency on Friday 10 March, which meant that it could no longer accept or receive payments. The sudden decline of SVBUK caused the Money Mover team to take a rapid and careful review of our exposures. While the main (and real) concern of SVB's depositors was their ability to access their funds, pay bills and make their payrolls, we knew we didn't hold corporate or client assets with SVB. 

Our network

Our business relies on transactional and network banks, so we next looked at the components of the chain of institutions we use to collect, convert, hold and pay out funds for our clients. We knew that SVB was not part of this network, as this duty is carried out largely by Barclays in the UK, assisted by local clearing partners for specific territories. Indeed, NatWest provided clearing banking services (which means its bank accounts and connections with payment schemes such as Faster Payments and SWIFT) for SVBUK and shut off its services on Friday night. SVBUK was not a foreign exchange (FX) provider or counterparty to us either, so we had no direct reliance on its services.

Funds coming from SVB

Then we looked at our market risk. Of the open (i.e. unsettled) FX conversions which our clients were holding, were we expecting settlement funds to be provided by SVBUK or SVB? If we were, it would be likely that such positions would have to be closed, delayed, or funded from other sources. Each of these scenarios could represent losses due to exchange rate differences, particularly in a volatile market. A quick review of our open positions suggested we could answer 'no' to that question.

Payments going to SVB

Then we looked at pending payments. Were any payments 'in flight' due to be sent to SVB or SVBUK? If so, these would be rejected and returned (meaning our clients would lose access to those funds for a short period of time) or locked up in the administration process (which could be an indeterminant period). Here we hit our first positive but, in consultation with affected clients, could cancel payments before they left the building.

What’s next?

So, the immediate operational impact to us and our clients of SVBUK's (and SVB's) failures was zero. By first thing on Monday 13 March, we knew that the US Federal Reserve had guaranteed the deposits of SVB and that the Bank of England and the UK Treasury had found a buyer (HSBC Bank UK PLC) for SVBUK. For the foreseeable future, it would be business as usual. Payrolls could run and invoices settled. Looking beyond this, however, it was clear that there would be a longer-term impact which would be much more significant. 

Most of our clients are in science and technology - particularly in the software and life sciences sectors. This is just the pond in which SVB fished, and we know that a number of our clients had a relationship with the bank. SVB's demise leaves a large hole in the landscape which will be filled in time but will cause dislocation and overhead for its clients and the wider sector. And the likelihood of contagion in the banking sector? The analysts are poring over the accounts as I write. You can bet that, with the means to disseminate bad news more quickly and extensively than at any time in human history, any market response will be rapid and deep.