{"id":8040,"date":"2023-03-13T12:17:35","date_gmt":"2023-03-13T12:17:35","guid":{"rendered":"https:\/\/www.boosst.financial\/insights\/?p=8040"},"modified":"2025-07-23T14:32:38","modified_gmt":"2025-07-23T13:32:38","slug":"lessons-from-silicon-valley-banks-demise","status":"publish","type":"post","link":"https:\/\/www.boosst.financial\/insights\/lessons-from-silicon-valley-banks-demise\/","title":{"rendered":"Lessons from Silicon Valley Bank\u2019s demise"},"content":{"rendered":"

The spectacular work \u2018Another Place\u2019<\/i> by the British sculptor Antony Gormley, of one hundred naked men scattered along 1.5 miles of Crosby Beach in Liverpool, provides a useful twice-daily reminder about hidden risks in the financial world.\u00a0 <\/span><\/span><\/p>\n

As Warren Buffet once said about easy money and favourable markets hiding risks:<\/span><\/strong><\/h5>\n

\u2018You only find out who is swimming naked when the tide goes out\u2019<\/strong><\/span><\/h4>\n

\"\"<\/a><\/span><\/p>\n

 <\/p>\n

The demise of Silicon Valley Bank (SVB) is a perfect example of being exposed by a falling tide.\u00a0 <\/span>The bank focused on providing banking services, including the placing of deposits, to many early stage and start-up tech firms, alongside venture capital firms, both in the US, and via SVB UK, to UK firms.\u00a0 <\/span>At the end of last week, depositors began to worry about whether the bank was going to be able to meet its obligations and began withdrawing their cash.\u00a0 <\/span>The root cause of their concern lay in the exposed reality of the risks the bank had taken by accepting deposits and then investing the money in longer-dated US Treasuries.<\/span><\/p>\n

That worked just fine when short-term interest rates were near zero and longer-dated bonds paid higher yields.\u00a0 <\/span>Unfortunately, SVB\u2019s skinny dip into the bond market was exposed by the rapid increase in bond yields in the second half of 2022, which saw yields on 10 Year Treasuries rise from 2% a year ago to almost 4% at the end of last week.\u00a0 <\/span>That put a huge dent in SVB\u2019s balance sheet, due to the losses incurred on the bonds as a consequence of these yield rises (bond prices move in the opposite direction to bond yields).\u00a0 <\/span>This in turn lead to a rapid loss of confidence that the bank could meet its liabilities.\u00a0<\/span><\/p>\n

SVB UK was purchased by HSBC for \u00a31 and its depositors\u2019 money was secured, allowing its young tech firm clients to avoid a severe, even terminal, liquidity crunch.\u00a0 <\/span>In the US, the Federal Reserve, the US Treasury and the FDIC, which secures deposits up to US$250,000, came up with a plan to protect all depositors, including those uninsured by the FDIC.\u00a0 <\/span>The Fed also set up a borrowing facility for other banks to provide liquidity against US Treasuries (and some other assets) based on the bonds\u2019 value at maturity.\u00a0 <\/span>Although other small banks are under pressure, this has likely stopped any systemic risk to the banking sector.\u00a0 <\/span>Equity and bond holders of SVB rightly face the risk of losing their capital.<\/span><\/p>\n

We may see some volatility in bank stocks until the full picture becomes clearer… i.e. is everyone else wearing swimming trunks and will the Fed\u2019s towel cover the embarrassment of any who are not!?<\/span><\/strong><\/h5>\n

 <\/p>\n

What lessons can we learn? \u00a0<\/span><\/b><\/span><\/h3>\n

Perhaps the most important aspect of this debacle is to identify what lessons we can learn.\u00a0 <\/span>Here they are:<\/span><\/p>\n

    \n
  1. A deposit is an unsecured loan to a financial institution.\u00a0 <\/span>Your money moves onto the banks balance sheet and you only get your money back if the bank remains solvent.<\/span><\/li>\n
  2. Government backed insurance schemes, have limits on how much they will protect you.\u00a0 <\/span>For example, the UK\u2019s FSCS guarantee on deposits is only up to \u00a385,000 per person, per eligible banking group.\u00a0<\/span><\/span><\/li>\n
  3. Diversification is critical to managing risk.\u00a0 <\/span>For those with cash, diversifying it between banks or via a money market fund should be an important consideration and advice should be sought where necessary.\u00a0 <\/span>CFO\u2019s of these tech start-ups, and those of the venture capital firms, should have known better than to leave their businesses (and shareholders) exposed.<\/span><\/li>\n
  4. The other aspect of diversification is to never invest in just one, or a handful, of companies. Investors in SVB will face significant capital losses. An investor with a diversified portfolio is only affected by losing the tiny part of global market capitalisation that SVB represented – around 0.03%. This is an insignificant amount and shows the benefits of a diversified, systematic portfolio. \u00a0<\/span><\/span><\/li>\n
  5. Never assume that all financial institutions are smart.\u00a0 <\/span>The age old mistake of borrowing short and lending long has brought down many institutions over the ages, not least Northern Rock in the UK during the Credit Crisis of 2007-9.\u00a0 <\/span>Many institutions regrettably pumped client money into Bernie Madoff\u2019s multi-billion dollar Ponzi-scheme fraud through insufficient due diligence.\u00a0 <\/span>More recently, many high profile firms backed Sam Bankman-Fried\u2019s now-collapsed FTX exchange in crypto-world (another area where a lack of swimming trunks is rapidly being revealed).\u00a0 \u00a0 \u00a0<\/span><\/span><\/li>\n<\/ol>\n
    A systematic investment process can protect you from many risks, not least through broad diversification.\u00a0 <\/span>Whilst the market\u2019s tide will ebb and flow, at least you know that you are swimming with your trunks on!<\/span><\/strong><\/h5>\n","protected":false},"excerpt":{"rendered":"

    The spectacular work \u2018Another Place\u2019 by the British sculptor Antony Gormley, of one hundred naked men scattered along 1.5 miles of Crosby Beach in Liverpool, provides a useful twice-daily reminder…<\/p>\n","protected":false},"author":2,"featured_media":8041,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[34,32],"tags":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/posts\/8040"}],"collection":[{"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/comments?post=8040"}],"version-history":[{"count":11,"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/posts\/8040\/revisions"}],"predecessor-version":[{"id":9433,"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/posts\/8040\/revisions\/9433"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/media\/8041"}],"wp:attachment":[{"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/media?parent=8040"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/categories?post=8040"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.boosst.financial\/insights\/wp-json\/wp\/v2\/tags?post=8040"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}