Nester: ‘More financial inclusion’ could have saved SVB
The collapse of Silicon Valley Bank (SVB) could have been avoided if the bank had had a more diversified client base.
That’s the view of Shariah-compliant peer-to-peer lending platform Nester, which says any bank is more vulnerable to collapse if most of its customers operate in the same industry.
SVB began to incur steep losses late last year as it was heavily invested in government bonds, which work well when interest rates are low but not when they rise.
Read more: ‘In turbulent times, P2P has role to play in a balanced portfolio’
SVB’s customers are mainly in the tech start-up space, who were increasingly demanding withdrawals due to the challenging macroeconomic environment with less venture capital funding.
“When [interest rates] increase, people tend to invest less in the start-up and entrepreneurial world because they can invest their money in more secure, higher-yielding financial instruments,” said Nester. “Without this funding source, SVB. tech company customers were no longer cash rich and had to withdraw their deposits to cover essential expenses like payroll.”
Increasing withdrawals eroded SVB’s asset base and contagion panic spread amongst its customers.
“News spread that SVB’s assets (government bonds) would not be sufficient to cover its liabilities (deposits from tech companies). Ultimately, this forced an unmanageable run on the bank, and regulators had to shut down SVB,” said Nester.
“We can see that more financial inclusion was needed. If SVB had diversified its customer base, it would have mitigated the risk of its demise.”
Read more: SVB UK continuing to service UK tech sector
HSBC bought the UK arm of SVB for just £1, which protected all depositors’ money with SVB UK.