101 on The Silicon Valley Bank Crisis: The Poor Role Comms Played in The Collapse
The financial world is currently in a state of flux after a high-profile bank used by a multitude of United States (US) tech startups rapidly collapsed this week, leaving its customers and investors panicked and in a bind.
Silicon Valley Bank (SVB), a bank that specialises in tech startups, collapsed just days ago and was very quickly taken over by federal regulators. It very quickly became one of the largest US bank failures since 2008 when the Washington Mutual bank went bankrupt.
However, if you are unfamiliar with how the US banking system functions, the crisis might be extremely convoluted and confusing. Below, we break down the crisis and explain how it happened and if it could have been avoided.
What is SVB?
SVB is a bank that specialises in banking for tech startups. It was started in 1983 and was providing financing for about half of venture-backed technology and health care companies in the US before its collapse. It was also a popular provider of payroll processing and personal wealth management.
While SVB may be a new name to most, it is actually of the top 20 American commercial banks and had about US$209 billion in total assets and about US$175.4 billion in total deposits, according to USA Today which was quoting the Federal Deposit Insurance Corporation (FDIC).
How did such a major bank collapse?
The collapse essentially began when the Federal Reserve, the central bank of the United States, as well as other central banks globally began aggressively increasing interest rates in an attempt to combat inflation.
As a result, it started to become more expensive to borrow money and the flow of cash from sources such as venture capitalists began to slow down. This caused many of SVB’s startup clients to start worrying and they began to withdraw funds from their own accounts to cover their cash-flow requirements. In order to keep up with the pace of withdrawals, SVB decided to sell its investments in bonds which included long-term government bonds typically known as treasuries.
Unfortunately, it had to sell some of these bonds at a loss because of the higher interest rates. Due to higher rates, existing bond prices tend to fall as newer issues attempt to compete with higher returns. In order to keep up with the loss, SVB ended up selling some of its own share stock.
Of course, when word got out, all this uncertainty and loss started to make SVB’s customers and investors very worried and they quickly began pulling out their funds – despite the CEO asking customers not to panic.
Since then, California banking regulators then decided to shut down SVB last Friday after consumers pulled out US$42 billion in a single day. By Sunday night, US regulators had made a plan and announced that they would be protecting the funds of customers by setting up a new financial backstop. This was done out of fears that people would begin to start withdrawing from smaller banks.
Did bad communication have a part to play in the crisis?
As the world grapples with the fallout from one of the biggest banking crises that the world has seen, the question that is being asked is simply if this could have been avoided had SVB and regulators controlled the narrative enough to ensure that panic did not ensue.
Edwin Yeo, the general manager of Strategic Public Relations Group, seems to believe so. “From what I can see, there are fundamentally two issues. The first is the bank’s overreliance on a single asset class for their investments – the US government bonds, which lost significant value when interest rates started rising,” he said.
“The second is poor communications by its former CEO Greg Becker, who personally told venture capitalists, one of their largest customer bases, to stay calm during the initial bank run, which usually is a trigger for more panic.”
He went on to say that this is the difference between good communication and bad communication. He said:
The bank was in a bad place, everyone knew this, and the playbook here would have been to be honest and transparent with their bad decisions and talk about what they are doing to avert a full-blown crisis.
“Venture capitalists, by nature, are opportunistic in recognising good deals, and at that point, Becker needed to know his audience,” said Yeo. He concluded by saying that while this would not have masked the bad decisions made, it would have perhaps held off from FDIC stepping in so soon.
“Right now, it’s too late, and the situation is out of their control and firmly in the US government’s hands in terms of managing this crisis. It’s a pity because the bank’s mission was a good one and they did indeed identify a good niche for them to grow their business,” Yeo said. He added that the bank still clearly needed to get its basics right as a best-in-class financial institution with the way they managed their cash.
Kenny Yap, the managing director at Socialyse and Red Havas agreed by saying that a large part that contributed the SVB crisis was the poor and unclear communication it had with its clients.
He continued by saying that while the company issued a press release seeking to raise cash, it failed to explain the actions taken to clients. It then tried to reassure everyone that everything was fine. “This inevitably led to doubts about the company, spooking fear and panic especially with the recent Silvergate bank collapse and memories of Lehman Brothers,” he said.
Adding on, Yap said:
To better manage situations like this, it is always important to have a robust communications plan anticipating all potential stakeholder questions – no matter how tough the questions are.
“Acknowledge the issue while delivering a timely message that demonstrates transparency and clear action steps. A lack of clarity and long silences often lead to the perception that the company is trying to cover up their situation,” he said.
How could the situation have been better handled?
Considering how important it is to manage communications when a crisis like this arises, it is important that banks have robust PR professionals in place who can advise management about the effects of governance decisions, on both reputation and business as suggested by Ashvin Anamalai, the CEO and co-founder of DNA Creative Communications.
“The context surrounding communication decisions and actions are significant: they greatly influence the scale of resulting outcomes,” Anamalai said. He did however acknowledge that there was likely no way for SVB to withhold the information to delay a crisis.
“While the bank most definitely appeared to attempt it judging by the astounding speed of the collapse, US financial institutions are heavily regulated. The swift intervention by the US government in activating damage control protocols are intended to isolate the incident and to maintain a broader confidence in the market,” he said.
He added that businesses and markets run on confidence and that right now, confidence is shaken. “Communication plays a crucial role in fostering or damaging confidence, as it can create or undermine trust among stakeholders. It is key to manage this crisis by monitoring conversations, creating a plan, addressing stakeholder concerns, and executing with solution-based communications. All this at the highest speed possible.”
He concluded by noting that brands only have one shot during a crisis and that the success of its future largely hinges on how they respond and react to the situation.
How did HSBC get involved?
Following SVB’s collapse, HSBC, which is Europe’s biggest bank, acquired the UK arm of the bank for £1 in order to secure the assets of British tech firms.
“As at 10 March 2023, SVB UK had loans of around £5.5 billion and deposits of around £6.7 billion. For the financial year ending 31 December 2022, SVB UK recorded a profit before tax of £88 million. SVB UK’s tangible equity is expected to be around £1.4bn,” HSBC said in a statement.
It added that final calculation of the gain arising from the acquisition will be provided in due course and that the assets and liabilities of the parent companies of SVB UK will be excluded from the transaction.
“This acquisition makes excellent strategic sense for our business in the UK. 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 UK and internationally,” said Noel Quinn, HSBC Group’s CEO.
Could the crisis impact Singapore?
Currently, according to the Monetary Authority of Singapore (MAS), the Singapore banking system has insignificant exposures to the failed banks in the US and that it remains sound and resilient amid heightened volatility in global financial markets.
“Banks in Singapore are well-capitalised and conduct regular stress tests against interest rate and other risks. Their liquidity positions are healthy, underpinned by a stable and diversified funding base. These factors will allow them to weather potential stresses from global financial developments,” it said in a statement on 13 March 2023.
It added that MAS is closely monitoring the domestic financial system and international developments and that it stands ready to provide liquidity through its suite of facilities to ensure that Singapore’s financial system remains stable and financial markets continue to function in an orderly manner.
Additionally, MAS is in contact with Enterprise Singapore to assess any potential impact of international developments on Singapore start-ups, including those with operations in the US. “The initial feedback indicates that the impact is limited,” MAS said.
That said, SVB has branches in many other parts of the world such as China, Denmark, Germany, India, Israel and Sweden which could eventually see a level of panic as the crisis continues.