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Silicon Valley Bank collapse a warning shot for accountants

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While the immediate liquidity crisis following the failure of Silicon Valley Bank has been averted, the bank’s collapse has exposed unexpected fragility at the heart of many business models and accountants should plan how to respond to similar events in the future.

14th Mar 2023
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After the dramatic implosion of its US-based parent company, HSBC bought the UK arm of Silicon Valley Bank (SVB) for £1 on Monday, taking on the subsidiary following frantic discussions with Prime Minister Rishi Sunak, Chancellor Jeremy Hunt and senior Treasury officials over the weekend.

Around 3,200 UK tech firms had more than £7bn deposited with Silicon Valley Bank UK (SVB UK). Had the Bank of England followed through with its initial plan to put the bank into insolvency measures, much of the cash would have been tied up and potentially at risk – with up to 50,000 jobs in the affected companies at stake. Without a functioning bank account, business customers would also have been unable to access funds or pay staff or suppliers.

Instead, due to the takeover, customers of SVB UK were largely able to access their deposits and banking services as normal, and the Treasury was quick to issue a statement that no taxpayer money was involved in the sale.

Major ripple effects

“The SVB case showed that things can change very quickly,” said Kirsty McGregor, accountant in residence at Capitalise. “SVB pretty much happened in 24 hours. It took me back to the start of the Covid pandemic when we knew it was on its way but we didn’t know what aid the government would deliver. This time, if the bank hadn’t been sold, without the US government protection, we could have been looking at a very different picture.”

The case serves as a warning shot, specifically for accountants with clients who have multiple links to tech providers such as e-commerce sellers. But while the direct impact on SVB customers was plain to see, the implosion of a large financial services provider has the potential to cause chaos in the wider business community, now inextricably linked through technology. 

A prescient example of this flagged by McGregor relating to the recent SVB crisis in online marketplace giant Etsy. This uses SVB to disperse funds to some sellers and has already put out a message about delays in processing payments.

“Etsy serves millions of micro businesses working from their kitchen tables, who are relying on it to pay them,” said McGregor. “This could cause many small business owners major cashflow issues.”

There are also other, wider ripple effects. It’s suspected that several large payment mechanism companies bank with SVB, which could cause widespread settlement delays and cashflow issues, while wider still tech infrastructure providers unable to make online payments may find their services dropping out – to the displeasure of their customers.

Education piece

For McGregor, this shot across the fintech bows acts as an education piece — both for businesses and their accountants.

“The message for accountants is that something like this may happen one day and there needs to be an element of disaster recovery planning,” she said. “What could go wrong for clients that’s out of their control? And how can they fix it? Accountants don’t want to be left on the back foot with a blank sheet of paper, having to quickly analyse risk for clients. 

“At Capitalise, we worked the weekend of the SVB collapse to make sure we had a plan for our accountants and their clients.”

There are steps a business can take to minimise the impact of any of the above scenarios, such as spreading banking and credit risk with multiple relationships or accounts. In such circumstances, it’s also helpful to understand how to monitor the live credit scores of their major customers and suppliers.

If the worst happens, the business should be able to take action quickly, activating emergency cash management or securing short-term funding.

“It’s about helping the business understand the whole ecosystem in which it operates,” continued McGregor. “Understanding their processes and facilities, then longer term making sure businesses understand their wider credit risks and can spot any weaknesses.”

Deeper worries for the tech world

The biggest bank failure since the financial crisis has triggered deeper worries in the tech world as investor belts tighten, demand for profitability rises and funding options decrease. 

“SVB was considered to be the lifeblood for the tech industry, offering facilities start-ups found hard to access elsewhere in the market, so although the immediate liquidity nightmare looks set to be lifted, worries will still linger about banking options ahead,” commented Susannah Streeter, head of money and markets at Hargreaves Lansdown.

While the outlook for technology startups has weakened for some time, industry insiders fear that the failure is part of a continuing decline that could see further failures and job cuts as the hubris of the post-pandemic tech-investment boom is unwound. The past few months have seen significant job losses announced at Microsoft, Amazon and Salesforce, and last week the contagion spread to the accounting tech world with Xero laying off 800 workers

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By Kirsty McGregor
14th Mar 2023 16:54

Thanks Tom for covering this. Glad wider UK businesses didn’t really recognise the implications of what this could’ve meant - thanks to Gary Lineker for diverting everyone’s attention!
Banking is all about confidence & the govt, civil servants (and no doubt many bankers, lawyers, and transaction support accountants) pulled off an amazing result before the markets opened on monday morning. The alternative could have led to contagion & worry about other banks, and then we could easily end up in 2008 territory again!
All seems calm now - and long may it stay that way!
But if it doesn’t, we now have a well worked-through plan B at capitalise for accountants & their clients. Hope not to have a weekend like that again!

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By [email protected]
15th Mar 2023 14:33

it's impossible for banking to be all about confidence, because if it were then every country's economy would have been affected by the 08 crisis in an identical way, and they weren't so it's not about confidence

It was also about the owned assets not being properly analysed (totally unsurprising given what has been publicized about the quality of work by the big4 for which I've had to compensate time and again) as well as banking industry structures - a long sequence of technical mistakes, in addition to contemporaneous high cost of oil, loose credit policies, New Labour's increasing debts to buy its votes, and not enough genuine experts like Ruth Lea around (far too many frauds)

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