SVB shows why we should worry about a ‘cool’ bank
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Bankers can be many things — the list is as long as the sum of human traits — but can they ever be “cool”?
The fact that Silicon Valley Bank boss Greg Becker sought to portray himself and his now defunct bank as such should perhaps have been a red flag for the tech community it was serving, as well as for regulators. Asked in a 2019 podcast how he would describe his job at a party, Becker said he would usually reply he had the “coolest banking job in the entire world”.
“I get to work with companies that change the world,” he told his interviewer, who was also a client and self-proclaimed “fan”, introducing SVB to his audience as “the future of banking”.
Indeed the concept of cool — invented, some say, by jazz trumpeter Miles Davis — seems very remote to banking, at base an intermediary business that transforms deposits into loans.
But SVB saw that by embracing the codes of the tech scene, it would attract customers. Over four decades, it cultivated the West Coast’s VC fund managers, a community that grew out of the reluctance of traditional lenders to back high-risk, innovative start-ups. The pitch worked.
“The ‘cool thing’ playbook was good to get money in the door but it is only half the puzzle,” said Richard Holden, economics professor at the University of New South Wales Business School.
SVB’s pitch led to a structural business model problem. Its client base — which was concentrated among companies or entrepreneurs typically with large deposits — was always higher risk in a bank run than a diversified bunch of retail customers. Meanwhile the lending side of SVB’s strategy — the money making part of it — had some related problems. The bank did not have a lot of leverage to impose higher rates on its borrowers, partly because it relied on them so much for their deposits. Neither was it well-positioned to lend to other industries, given its focus on one single ecosystem.
“This was no fertile ground for lending,” Holden said. “They had a lot to lose with a herd behaviour risk.”
It is tempting to downplay the risks of providing cheap bridge loans to start-ups before the next round of fundraising or a listing, when everything tech has been so popular. But when interest rates started rising and easy money stopped being available, the flaws in SVB’s business model became apparent.
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Another problem was that the bank overlooked the important but boring job of risk management. At a time of low rates, its decision to invest in long-dated held-to maturity securities to boost profit was not irrational. But a more anxious and less cool bank might have paid more attention to the mismatch risk on the balance sheet. They could have used swaps to hedge the portfolio against higher interest rates, or invested in more suitable securities, a former European bank executive remarked.
Another red flag was SVB’s spectacular growth, the European bank veteran added: “Banks rarely grow much faster than their peers. When one does, it means they are taking more risks.”
Many lessons will be drawn from the demise of SVB — including from a regulatory point of view. But one thing is certain, it ends the myth of the cool bank. “Boring is good if it means safe,” Holden said.
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