SVB crisis shows need for diversified funding options

The collapse of Silicon Valley Bank (SVB), and the dramatic bail out of its UK subsidiary by HSBC, has highlighted just how exposed many tech and life science start-ups were to a banking failure.

Bank shares in Asia and Europe have plummeted, despite the UK rescue deal and reassurances from US president Joe Biden that America’s financial system is safe, after moves to shore up the system by the Federal Reserve.

“SVB was important for more than one reason,” says Oliver Chapman, chief executive of supply chain specialist OCI. ”Much of the publicity concerning the crisis has centred on the importance of the bank in providing deposit facilities for tech startups that might otherwise have struggled to find a bank willing to provide normal services.

”Without support from the FED and HSBC’s takeover of SVB in the UK, these deposits may have been in jeopardy.

“But there was more to SVB than a provider of traditional banking facilities to techs without years of trading history. Techs often have complex financial requirements, as indeed do many of the Venture Capitals that fund them.

”In the small, closely connected world of Silicon Valley and the global tech ecosystem for which it is the core hub, SVB was a key player in providing loans and complex financial services.”

Biggest failures since the GFC

In addition to SVB, another US lender - crypto-friendly Signature Bank - collapsed over the weekend. It follows last week’s announcement of impending liquidation by another crypto-focused bank, Silvergate Capital Corp.  

They are the most high-profile banking failures since the height of the Global Financial Crisis in 2008.

The main difference between the current insolvencies versus the subprime crisis is that financial services institutions which faced insolvency or collapsed during the GFC were some of the world’s biggest banks.

Banks such as Lehman Brothers and Northern Rock were thought to be “too big to fail”, until the house of cards upon which the subprime market was built came tumbling down.

By contrast, SVB, Signature and Silvergate are small to medium-sized banks which have business models that are overly skewed towards one industry sector. Such a high risk, high reward strategy is naturally more exposed to the volatility within those markets and the impact of interest rate rises.

OCI’s Chapman says that the crisis at SVB shows the importance of diversified funding options, for both the physical and digital supply chain. 

“The supply chain is a good example of a complex ecosystem that requires sophisticated financial arrangements. But unfortunately, banks are not always well-placed to understand the unique challenges of the supply chain. 

“This is why it is so important companies have a detailed understanding of their supply chain, funding options and, indeed, the importance of funding diversification.”