The Memo: The latest on the SVB collapse

Group 723.png

The latest on the SVB collapse

Cait Evans – 20 March 2023

The collapse of the Silicon Valley Bank (SVB) is arguably the most significant since the financial crash of ’08, and the 2nd largest bank collapse in history, but what exactly went on and why did HSBC step in?

SVB was founded back in 1983 by two ex-Bank of America managers with the aim of appealing to start-up companies. This was crucial at the time as traditional banks didn’t necessarily understand how their business models operated. SVB made banking for start-ups easier - willing to provide loans to them despite their typical lack of revenue. Before its demise, SVB was the 16th largest bank in the US, according to the Federal Reserve and most tech startups banked with them.

With rising interest rates by the Federal Reserve in order to combat inflation, the problem was that investors are more risk averse in these conditions, something which doesn't suit the style of start-up investment. As a result, many clients pulled their money out of the bank, panicking investors to such an extent that it ultimately caused the bank to collapse (with its assets placed under control of the Federal Deposit Insurance Corp). It also had a knock-on effect in the UK market, as at least four in ten UK digital startups and growing businesses banked with SVB’s UK branch before the crash.

Much to the relief of the UK tech sector, HSBC stepped in to take over the UK branch of SVB for the symbolic price of £1. HSBC Chief Exec Ian King reported that the decision to bid was made after just 5 hours of due diligence. Due diligence is one of the first steps of any acquisition and is a process carried out by the acquiring company along with accountants and financial advisors, but lawyers are typically brought into the process as well. At this stage, lawyers will take a deep dive into the target company and look at things like outstanding debts, pending/potential lawsuits & employment contracts etc. Due diligence is crucial as when a buyer acquires shares or assets in a business, they will be subject to the principle of ‘caveat emptor’. In other words, the onus is on the buyer to ensure what they are acquiring is suitable and they bear all the risks of a bad investment.

In the meantime, if you have your sights set on any transactional areas of law, it would be a good idea to get familiar with the concept of due diligence, as you can expect to do a lot of it as a trainee!