Silicon Valley Bank (SVB) collapsed one year ago on Sunday, an event which created a ripple effect of widespread damage across the financial sector.
The failure of SVB was the third-largest in US history, and the biggest bank to shutdown that year.
Finextra previously covered
the downfall of SVB, explaining the reasons for its failure, which was a combination of poor decisions from the executive board, a rise in interest rates which dipped the value of SVB’s portfolio, and a loss of vital deposits when investors moved to pull
funds. My colleague Scott Hamilton also
covered which banks were most impacted by the failure, detailing the disruption.
The 2021 tech boom led to lots of cash investments in tech start-ups, a great deal of which were backed by SVB. Due to the wealth of businesses running through SVB, the failure of the bank had a major impact on fintechs and left the financial services sector
shaken. Consequently, the year post-SVB has led to reflection and re-evaluation of how risk management and economic uncertainty is handled in the current market.
Impact of the collapse
What business leaders in the industry have commented on in regards to the collapse, is that though it was a shock to the sector, fintech is a resilient industry and the community rallied post-SVB. HSBC’s move to buy the
UK arm of SVB for £1 was a demonstration of the how solutions were actively being developed as the collapse was in motion.
Ritesh Kumar, director of procurement and supply chain intelligence at The Smart Cube, details the significant changes brought about by the failure include increased competition in banking deposits between regional and incumbent organisations, smaller banks
facing challenges with interest rates and deposits, and real estate prices seeing consequences with limited access to credit. He also notes the loss of confidence in US financial institutions that had a long lasting impact on small businesses and consumers.
“Looking at specific regions, HSBC acquired SVB's UK subsidiary to avert a crisis for UK startups. In mainland Europe, the impact was less severe as SVB did not have a banking license for its branches in Denmark or Sweden, while its German office did not
offer deposit services. European startups that relied on SVB for capital are experiencing delays in processing checks, but the critical dependency on banks for payroll and other essential functions is less pronounced compared to the US.”
Wayne Scott, regulatory compliance solutions lead at NCC Group Escode explains that despite the major repercussions of the failure, the financial services industry had a “safety net” in place. He expounds:
“SVB’s issues happened at a time when global regulation around supplier failure, service deterioration and concentration risk was gathering speed. SVB’s failure may have fed into these discussions somewhat, but we can say that financial stability of the
suppliers, and their ability to absorb any financial shocks, is now top of every regulator’s radar globally, and rightly so. Building robust controls to cope with supplier failure is the key to mitigating the ramifications of these threats and has clearly
been acknowledged by the European Supervisory Agencies’ recent inclusion of ‘insolvency’ as a must test scenario under the Digital Operational Resilience Act.”
Su Carpenter of Crypto UK states: “At the time of the collapse, we saw the potential for some guarded optimism. There were mainstream institutions stepping in to take over the accounts of some of the impacted organisations and we hoped this may be a first
step in seeing some acceptance of these tradfi organisations softening their risk approach to fintech and digital asset businesses. However, the recent APPG Fair Banking inquiry on De-banking has highlighted that there are still fundamental issues with debanking
of businesses within our sector and the limitations on access to basic banking facilities for the UK crypto/ digital asset industry.”
Konstantin Dzhengozov, co-founder and CFO of Payhawk states that the global financial landscape has recovered unevenly after the crisis triggered by SVB. Credit markets took time to stabilise and growth was stunted due to the recession, yet the industry
has changed for the better.
Managing partner at Notion Capital Stephen Chandler comments: “The big banks benefited (you only need to look at JP Morgan's cash deposits) and the smaller ones suffered. HSBC got a stunningly good deal for SVB Europe. SVB, in its two new guises, continues
to hold an extremely strong position in VCs and VC-backed businesses. Fintech has suffered in a significantly constrained funding environment, especially lower margin models and those more impacted by higher interest rates (such as BNPL). We do however see
'green shoots' with increased activity in the space.”
Chandler continues that the SVB revealed weaknesses in the system, that money moves faster than anyone anticipated which lead to such a widespread domino effect. The banking facilities available to crypto still remain limited due to risk concerns, he said
that both banks and crypto firms need to look for new routes to de-risk themselves. He concluded that the only way the industry will stabilise is if issues are brought to regulators.
What has the industry learned?
Emma Hagan, who was the former chief risk officer for EMEA at SVB and now works as chief risk and compliance officer at ClearBank, commented on the impact of the bank’s failure on the fintech space, detailing that they fall into the categories of risk management,
trust, and scrutiny.
Dzhengozov outlines lessons learned from the failure: “Firstly, diversify your financial sources and relationships. Relying solely on one institution, even an established name like SVB, left many start-ups stranded when it failed. Secondly, ensure strong
financial governance and risk planning. SVB's aggressive growth mindset overlooked prudent foresight which led to its downfall. Entrepreneurs should take a measured approach and implement controls to monitor risks. Thirdly, have a trusted CFO or advisor in
a 'watchdog' role to vigilantly track financial conditions and warn of potential threats. Finally, be prepared for uncertainty and have contingency plans.
“Crises can strike rapidly so build resilience by scenario planning and maintaining adequately diversified funding sources. Though no institution is immune to failures, applying these lessons will help entrepreneurs safeguard their ventures against financial
turbulence. The SVB collapse was a wake-up call to revamp governance and risk policies. By learning from this crisis, businesses can mitigate risks and chart a stable growth trajectory.”
Hagan states that as a result of the collapse, the Bank of England stepped up its monitoring of social media platform and there was a surge in the financial industry to step up risk management protocols.
“When it comes to trust, there’s certainly still a level of apprehension and concern among depositors, particularly when it comes to safeguarding post-SVB. This has been further exacerbated by the regulatory issues surrounding Railsr and Solaris and touches
many other firms in financial services and fintech more broadly. In response to this erosion of trust, we’ve seen increased scrutiny from regulators around the safeguarding of deposits, and sustainable banking business models. This scrutiny is only set to
intensify for both banks, payment companies and EMIs in the coming months.”
Hagan furthers that the risks of a social media driven-bank have been revealed, and challenger banks are learning from SVB’s mistakes where is comes to resilience. Dzhengozov corroborates this point, stating that the failure highlighted the oversight in
the industry in resilience and security reforms. He details that the collapse demonstrated the risks of interconnectedness, concentration risk, and how major banks can also fall due to liquidity crises.
Ashish Garg, founder and CEO of Eltropy agrees on the risks of how connected the banking world is currently, and the fact that a few comments from SVB executives raising doubts led to a mass withdrawal of funds.
However, Garg also notes the positive outcomes of the failure: "We saw the government can still play a big role during crises like this by stepping in to calm fears. This was a textbook case of a bank run, and thanks to the government's actions, the fallout wasn't as catastrophic as it could have been. The collapse also reminded us of the difference between paper wealth tied up in illiquid assets versus cold hard cash that's liquid and accessible. Both SVB and First Republic seemed overexposed to illiquid holdings instead of liquid reserves to ride out a crunch. And for startup founders like myself, it's brutally hard to tap into the wealth we have stuck in our company stock and equity. Our personal financial flexibility gets really constrained."
From a VC perspective, Chandler comments that VCs are encouraging against concentrating risk in one bank or fund, and ensuring liquidity is well-spread. He adds that operational risk needs to be further digitised.
Kumar notes: “SVB’s failure also underscores the importance of operational resilience. Banks need to ensure robust risk management practices, including effective operational risk management (ORM) and situational analysis. Further to this, the collapse also
underlined the importance of asset-liability balance. In instances where a bank's assets and liabilities are not appropriately aligned, it can result in significant financial instability and, ultimately, failure. SVB’s downfall resulted from an asset-liability
mismatch; the bank held long-term government bonds but relied heavily on short-term uninsured deposits, which led to significant losses.
“As well as this, in the aftermath of the bank’s failure, it became evident that robust supervision mechanisms are essential for maintaining the stability and integrity of the financial system. In the instance of SVB, the Federal Reserve’s supervision fell
short. Red flags, such as explosive asset growth, reliance on uninsured deposits and interest rate risk should have triggered greater scrutiny.”
How has regulation been reformed as a result of the collapse?
Since the fall of SVB, financial regulators and governments have been working towards maintaining stricter standards for resilience and risk management. The
UK’s finance ministry announced plans for managing small bank failures more efficiently in 2024. In late 2023, the
Federal Deposit Insurance Corporation (FDIC) proposed governance for risk management for US banks. Similarly, banks have been strengthening their risk management profiles to prevent another collapse from taking place.
Touching on the adjustment of risk appetite, Hagan details that there is a renewed sense of caution in the industry and that the loss of trust led to regulators and business leaders increasing their standards for resilience. She comments:
“Traditional banks, especially those who have been slow to adapt, may find themselves particularly at risk. Challenger and infrastructure banks, however, which have proactively implemented measures such as holding funds in central banks to enhance liquidity
and future-proofing are better positioned to mitigate the impact of any unforeseen events.”
Kumar details that further transparency has been demanded by regulators from banks and portfolio diversification has been encouraged by regulators. He emphasises that there has been a good foundation for recovery built up.
Dzhengozov adds: “Regulators have mandated stricter stress testing requirements and compelled firms to develop comprehensive contingency plans since SVB's failure. Many institutions have re-evaluated counterparty risk exposures and diversified their funding
sources as well. These are positive steps that have enhanced the industry's resilience. However, continued vigilance is essential. We cannot become complacent and assume the work is done.”