The collapse of Silicon Valley Bank last March was a stark reminder of the underlying risks involved in placing unwavering support to niche banks during a time of economic uncertainty.
Emma Hagan, Chief Risk and Compliance Officer at ClearBank, spoke to Payment Expert on what has been learned from the collapse of SVB six months on and the importance of tapping into social media liquidity as traditional risk management tools may soon be outdated.
Payment Expert: Firstly Emma, what was your initial reaction and thoughts when Silicon Valley Bank collapsed last March?
Emma Hagan: Initially, surprise! Not at least at the speed at which it happened, fuelled by social media. Like many institutions, we quickly worked to understand any connections that we or our customers had to SVB such that it might cause a downstream impact.
PE: Have you sensed any customer scepticism around the banking sector since the collapse and what can be done by major banks to help alleviate those fears?
EH: Often, a bank failure leads to some general scepticism around the banking sector, particularly for those who remember the financial crisis in 2007-2008, given the domino effect that banking failures had on the market and the realisation of just how connected the financial system was.
With that said, our business model means that we are less exposed to some of those risks, which was a supporting factor as to why a number of customers chose to work with us initially, due to the reassurance the way we operate gave.
In terms of generally alleviating those fears, there was a lot of reporting at the time that the UK had additional safeguards in place from a regulatory perspective, which helped, along with very swift and decisive action in relation to the UK business of SVB.
Specific to individual institutions, ensuring that they review the issues that led to the collapse of SVB and ensuring that they are mitigated as far as possible, will certainly help but there were some unique factors at play, such as the speed at which this played out, which are challenging, to give assurance that it could never happen again.
PE: ClearBank saw a 20% rise in deposits after SVB’s collapse. How much do you credit this with the bank’s policy of no lending on deposits?
EH: Our approach of no lending of deposits certainly helps, particularly in uncertain times and with the backdrop of bank failures.
Knowing your funds are safe and available to you is a significant benefit, which the 20% rise really demonstrated – we didn’t do anything different or special for this to happen, it was a natural product of our model and proved that there’s a real opportunity in the market for a different kind of bank.
PE: The UK has laid out intentions to form a Silicon Valley-type environment, how feasible do you believe this is and what needs to be done for this to happen?
EH: There have been various initiatives over the years aimed towards creating this, which has certainly supported the early development of the technology and innovation ecosystem in the UK.
It may take some time to create the right environment to be a challenger and real alternative to Silicon Valley. It will take several different factors to happen to help, such as the availability of capital, a supportive financial services community, further encouragement of entrepreneurship and acceptance of failure, as well as ensuring that the right talent has access to the UK.
PE: What has the collapse taught you six months removed and the importance of readily available alternative bank providers?
EH: There’s more recognition that niche, focused banks – like SVB – are more at risk due to the outsized impact on the segments they serve. You only have to look at the outcry from the tech and innovation players in the UK at the prospect of SVB going out of business and the impact it would have had on that ecosystem if it wasn’t rescued.
Social media having such a significant and rapid effect on the liquidity of a bank is something banks are still grappling with, particularly since the standard model has always been driven by net interest margin and lending using those deposits.
However, this is less likely to happen again in the UK where liquidity regulations are stronger than in the US.
PE: Lastly Emma, and thank you for your time, do you foresee another SVB-like collapse in the future and what lessons will be applied to help prevent this?
EH: Well, the genie is out of the bottle, by which I mean the speed of a bank run driven by social media is a relatively new phenomenon and institutions are still working out how to prevent it from happening again.
The fractional banking model used by most banks means they need to use their deposits to fuel lending or to put them to work to drive profits and returns for shareholders. This means the risk is still there if large numbers of customers choose to withdraw funds at the same time and banks therefore need a new playbook.
The traditional risk management strategies, including crisis communications, are no longer fit for purpose in the era of social media-driven bank runs.