Bank of England rushes to stem SVB damage

The UK arm of Silicon Valley Bank (SVB) was put into insolvency by the Bank of England after the shutdown of the bank’s US entity. Tech start-ups that bank with SVB in the UK have expressed concerns over their liquidity and have called for government intervention. Over 200 founders and leaders of start-ups have signed an open letter to the UK Health Secretary, Matt Hancock, warning that many are running numbers to see if they are technically insolvent. The letter was signed by companies that have raised over $6.4 billion in venture capital funding and employ over 10,000 people.

The Risks of SVB’s Insolvency

Most of the UK’s most exciting tech businesses bank with SVB and have no or limited diversity in where their deposits are held. This means that the insolvency of SVB may affect many small start-ups. Daniel Shakhani, founder of Salary Finance and an investor in several firms that received SVB funding, fears that the UK entity of SVB may be left orphaned if the US arm is sold.

Hephzi Pemberton, the founder of Equality Group, confirms that 90% of their funds are frozen in SVB UK. She says, “We are scrambling to make payroll for March, and it will involve a lot of maneuvering to make it happen.” Many in the tech industry consider the government’s intervention necessary to avoid a potential crisis involving liquidity and insolvency.

Arguments Against Government Intervention

Not everyone in the tech industry supports the push for government aid. Some are privately concerned that asking for help might fuel panic, and others argue that bailing out banks would create a “moral hazard.” London-based tech investor Roxana Mohammadian-Molina says, “Over the past decade, tech companies have indulged in a level of excess that makes the excesses of the pre-2008 bankers pale in comparison.”

She adds, “If there was little public support for rescuing privately owned financial institutions back in 2008, there is even less support to bail out them and their big tech customers now amid the cost-of-living crisis.”

Related Facts

• SVB is a lender to companies in the technology, life sciences, and venture capital industries.
• SVB UK says it has “a limited presence in the UK and no critical functions supporting the financial system.”
• The insolvency of SVB’s US arm was caused by a “lack of liquidity” brought on by the coronavirus pandemic.

Key Takeaway

The insolvency of Silicon Valley Bank, one of the biggest lenders to tech start-ups in the UK, may have far-reaching consequences for small businesses that bank with it. The government is being called on to intervene and provide liquidity measures to stem the damage, but not all in the tech industry support this call. The situation highlights the vulnerability of start-ups to external events and the dependence of many of these firms on a small number of lenders.

Conclusion

The crisis involving Silicon Valley Bank demonstrates the fragility of the UK tech industry and the need for diverse funding sources. Many start-ups, particularly those in the technology and life sciences sectors, rely heavily on loan capital from a few lenders. The government must balance preserving small businesses with the risk of creating a “moral hazard” by bailing out banks and their customers.