Silicon Valley Bank collapse and contagion

Although the recent failure of Silicon Valley Bank has caused some disruptions, property investors and landlords need not be unduly alarmed. The key concern at present is whether there will be any contagion effect on other banks and their confidence.

While the situation appears to be relatively contained, if the linkages with other financial institutions become apparent, there is a possibility of a potential domino effect that could impact the broader financial market. The criminal risk mismanagement at SVB was of course a mismatch between liquidity requirements and debt maturity.

It is worth noting, however, that Silicon Valley Bank's failure does not appear to have any direct exposure to the UK property market. Despite this, it is prudent to stay informed and aware of any developments that may arise.

After the financial crisis of 2008 the regulations around large financial institutions, especially banks, were tightened up and the level of reserves they have to hold on their balance sheets ramped up massively. They have to undertake stress tests regularly to prove to the regulator they are financially capable of withstanding massive one-off financial shocks. So in the UK at least, we shouldn't see an banks collapsing, as long as the regulator's rules and the stress testing prove to be robust enough.

There is old saying across trading floors in the City that "Central Banks keep raising rates until something breaks". That sound you
currently hear is something breaking. Not content with nearly blowing up the Gilt market (and taking Liz Truss as collateral) during October, rates have kept heading higher and finally forced one small US bank to collapse with shockwaves sending out systemic risk to all parts of the financial markets. Clap, clap, clap. Well played sirs. Funnily enough within a bank's internal financial 2023 forecasts there was no "raise interest rates from 0% to 4% within 12 months" scenario. Because it was never expected. The law of unintended consequences strikes again.

The collapse of Silicon Valley Bank highlights the need for entrepreneurs to have a game plan in place to protect their assets and ensure liquidity during a crisis. With the current economic outlook, weak Crypto market & planned CDBC's, we expect more banks could be impacted, and because of their interdependencies, more businesses could be affected. To mitigate risk, entrepreneurs should consider have a game plan;
Spread deposits over different banks; ensure that you have supportive suppliers who can help with liquidity problems; agreement with employees around salary payments; factoring to turn accounts receivables into cash faster; and a revolving loan facility if sales are doing well and the business is growing.
Managing fear and maintaining relationships with employees, clients, and suppliers is critical during a crisis.

USA are not doing as well as us at the moment and a run on the bank at the wrong time will cause exactly this. People heard about the SVB going down and rushed to Signature to do the same. It needs to be understood that when everyone rushes to pull their money out, it just kills banks. Without this run, they will probably just keep going and push through to the other side. It would be very silly to think UK banks would be going down, especially after the record mortgage year last year. That said, a badly timed run could be a downfall. I hope people can see sense.

Logically, the collapse of two relatively small banks in the US shouldn't cause a run on the banks on this side of the pond. HSBC and the UK Government did well to rescue SVB UK quickly and so remove a stress point for FinTech Startups in the UK.

However, banking sentiment, herd instinct and logic are not always easy bed fellows. Despite all best intentions, there comes a point in any run on a bank where herd instinct takes over from logic - if everyone else is withdrawing their money then I should too. Couple this with the ease of doing that in today's world rather it was in 2008, i.e. a few taps on an app rather than queue in the cold or an endless call to a call centre.

Shouldn’t we get at least as excited about the future of banks, on which we rely, as we do to the future of a football pundit, on which we don't?

Silicon Valley Bank and Signature Bank are well known to start ups and crypto market firms (not so much to the general public). Their collapse would have seen many losing their funding and many thousands unemployed (particularly in the US). Whilst not on the scale of Lehmans and Northern Rock, the central banks had to step in quickly to support market confidence avoiding a run on other banks, and a spiral effect. The cost of borrowing amongst banks has nosedived as a reaction to this injection of money (0.4% off the money market rates since Thursdays close). It may not stop a run on other banks in a similarly precarious position but thankfully there seems to have been a lesson learned in how to control the damage.... Without a crystal ball we can't say what fallout could be but no doubt many will be watching in earnest.

Don't panic - unless you are an SME Crypto business needing finance or banking in which case dust off the prayer mats! This is a limited issue impacting relatively small US banks that had gambled on Crypto businesses.
It is unlikely to impact the UK heavily due to the dominance of large, highly diversified mega banks here. This was one of the ironies of the last banking crises, and many of the small players that folded, were absorbed into the biggest survivors. Attempts to force those mega banks to split off arms such as Williams & Glyn have been largely unsuccessful and were quietly shelved. However, this has meant they are better able to weather these smaller storms.