Finance & Banking , Industry Specific
SVB Dominoes Fall: HSBC Buys UK Arm; Feds Grab Canadian Arm2 More Regional Banks Showing Signs of Liquidity Issues; Feds Reassure Depositors
In the latest fallout from the second-largest bank failure in U.S. history, Europe's largest bank on Monday acquired the United Kingdom subsidiary of Silicon Valley Bank, and Canada's government took control of SVB's Canadian branch late Sunday.
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London-based HSBC's $1 buy ensures that all Silicon Valley Bank U.K. depositors will continue to have access to all their money without any disruption. Before HSBC came forward, the Bank of England was planning to pursue a bank insolvency procedure, meaning SVB U.K. depositors would have been eligible to receive no more than $102,904 - or $205,808 for joint accounts - in immediate reimbursement (see: Feds Will Make SVB Depositors Whole, Avoiding Payroll Crisis).
Silicon Valley Bank catered to early-stage startups, including well-known cybersecurity vendors, for four decades, but after an unsuccessful attempt to raise $2.25 billion in a new stock offering this last week, its stock nose-dived, depositors cashed out and the Federal Deposit Insurance Corp. took the bank into receivership. SVB was one of the nation's top commercial banks, with $209 billion in total assets at the end of 2022, according to the FDIC.
"This action has been taken to stabilize SVB UK, ensuring the continuity of banking services, minimizing disruption to the UK technology sector and supporting confidence in the financial system," the Bank of England said in a statement Monday. "All services will continue to operate as normal and customers should not notice any changes."
Meanwhile, Canada's Office of the Superintendent of Financial Institutions took temporary control of Silicon Valley Bank's assets in Canada, where it operates as a foreign bank branch based in Toronto. The OSFI intends to seek permanent control of SVB's Canadian assets and has requested that the Canadian attorney general apply for a winding-up order, which, if successful, would put the bank into liquidation.
SVB primarily lends to corporate clients in Canada and doesn't hold any commercial or individual deposits in the country, according to the OSFI.
Why SVB UK Has a New Owner, But SVB US Does Not
Silicon Valley Bank U.K. staff remain employed, clients can contact the bank through their usual channels and borrowers can continue to make any loan repayments to the bank as normal. One Silicon Valley Bank customer on both sides of the pond was application security startup Snyk, which first worked with the bank in the U.K. and then struck up a relationship in the U.S. after expanding across the Atlantic.
"This acquisition makes excellent strategic sense for our business in the UK," HSBC Group CEO Noel Quinn said in a statement Monday. "It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life science sectors, in the U.K. and internationally."
"Although SVB will survive in some form, it's hard to imagine the successor being as founder-friendly as SVB for venture debt."
– Hyoun Park, CEO, Amalgam Insights
Silicon Valley Bank was the 16th-largest bank in the United States by assets at the end of 2022, but the relatively small size of Silicon Valley Bank's U.K. arm made finding a permanent home for it more straightforward than the daunting task United States regulators now face. On Friday, Silicon Valley Bank U.K. had a total balance sheet size of $10.65 billion, a deposit base of $8.11 billion and loans of $6.66 billion. Regulators determined the bank wasn't recoverable given the eroding liquidity and confidence (see: SVB Collapse Is 'Self-Inflicted Gunshot Wound' for Startups).
"HSBC is Europe's largest bank, and SVB UK customers should feel reassured by the strength, safety and security that brings them," U.K. Chancellor Jeremy Hunt said in a statement Monday.
In contrast, Silicon Valley Bank in the U.S. has more than $209 billion in total assets and $175 billion in total deposits, which means the FDIC needs to find a buyer with the financial wherewithal and management expertise to handle those assets and customers, but not one that is so large as to be considered "too big to fail."
First Republic Uses Federal Backstop at Its Own Peril
Silicon Valley Bank clients in the U.S. that had above $250,000 in their accounts had the same uncertainty as their U.K. counterparts with high bank balances around how much of their uninsured or unprotected deposits would ever be returned. While British authorities resolved the matter through the HSBC sale, U.S. authorities opted for a federal backstop, meaning all depositors have access to all their funds today.
"While I'm glad to see the Fed/FDIC/Treasury take action, it would have been nice if they had taken this action 48 hours ago," AllegisCyber Capital Managing Director Bob Ackerman wrote on LinkedIn on Sunday. "A lot of anguish, fear and anxiety could have been avoided on the part of thousands of startup companies and their hundreds of thousands of faultless employees. We might also still have the venerable SVB."
To reduce the likelihood of additional bank failures in the United States, the Federal Reserve Board announced Sunday it would make additional funding available to eligible institutions to ensure banks can meet the needs of all their depositors. The offer of assistance comes after New York's Signature Bank - which had $118 billion in assets as of 2021 - was closed by state officials Sunday.
Late Sunday evening, First Republic Bank - which had $181.1 billion of assets in 2021 - announced plans to tap into additional liquidity from the Fed and JPMorgan Chase. The move means First Republic Bank now has more than $70 billion of available, unused liquidity to fund its operations. First Republic's stock plummeted $52.38 - or 64.14% - to $29.32 per share Monday, the lowest it has traded since late 2011.
How SVB Fueled Growth at Zscaler and CrowdStrike
Many of the most powerful companies in cybersecurity turned to Silicon Valley Bank at some point during the growth journey for easy access to capital. One of those companies was Zscaler, which in January 2015 set up a $15 million, two-year credit line with Silicon Valley Bank. The cloud security firm ended up borrowing $5.5 million from SVB before ending the credit line in April 2016.
Founder, chairman and CEO Jay Chaudhry wrote on LinkedIn on Sunday that less than 0.1% - or $1.9 million - of Zscaler's $1.9 billion in cash and investments is currently deposited at Silicon Valley Bank. Chaudhry said Zscaler has put the vast majority of its $1.9 billion into "extremely safe and liquid investments," such as short-term U.S. Treasuries or government money market funds.
"Although SVB had been our banking partner in the past, our current banking partners are among the largest, more stable global banks," Chaudhry wrote on LinkedIn.
Unlike Zscaler, CrowdStrike continued to work closely with Silicon Valley Bank even after going public. The endpoint security behemoth established a $150 million revolving line of credit with the bank in April 2019 - two months before CrowdStrike's initial public offering - and in January 2021 expanded the credit line to $750 million and pushed the maturity date out from 2022 to 2026.
CrowdStrike said late Friday that its revolving credit facility remains undrawn and that the company doesn't foresee a need to access that facility. The company said it diversifies risk across more than a dozen financial institutions, and 90% of CrowdStrike's funds are held in large global institutions.
"Although SVB will survive in some form, it's hard to imagine the successor being as founder-friendly as SVB for venture debt," industry analyst Hyoun Park wrote on LinkedIn. "Larger banks won’t cut the same slack because they don’t need to or want to. This is a loss for entrepreneurship. Going forward, this is yet another challenge newly funded companies will have in finding cash compared to the SVB days."