History repeats itself, once again
Central banks around the world had assured us that banks would no longer fail like they did during the 2008 Banking Crisis, but here we are again with yet another very public collapse (and a not so well publicised collapse of Signature Bank NY on 12th March 2023). Of course, the circumstances are different to the 2008 Banking Crisis days, and there is probably a low risk of the banking system collapsing, but the story is compelling.
As it has been well publicised, Silicon Valley Bank (SVB) was declared bankrupt on Friday, 10th March 2023. They were the 16th largest bank in the US. What allowed a bank of such scale to fail so rapidly? The key distinction lies in the prevalence of social media, which enabled the downfall to play out in real-time on Twitter within a single day.
The uniqueness of SVB is that it specialised in providing banking to many venture-backed technology and life sciences companies in the US and was a personal banker to entrepreneurs and underwriting company listings. At the height of the low-interest rate era in 2021, SVB got flooded with money seeking higher returns, creating a situation of excess liquidity. To satisfy shareholders, SVB invested massive amounts of these excess funds in government-backed securities carrying a high (for that time) interest rate of about 1.64% pa. However, the funds were locked in for an extended period, ten years and more. This improved the profitability of SVB in the short term but exposed them to potential risks in case interest rates rose quickly, which at that time was unthinkable. Rapid interest rate hikes in 2022 devalued this securities portfolio, with mark-to-market losses apparently exceeding SVBs total capital.
With technology companies' valuations reducing rapidly in the post-peak pandemic era, deposits at SVB were drying up fast, especially during Jan and Feb 2023. This forced SVB to try to sell some liquid securities at a loss and reinvest it in shorter term higher interest-rate earning assets. However, this would have resulted in an almost US$ 2b loss. But the plan was to compensate for this with a public offer to raise additional funds. However, this plan was a red flag to investors who pulled out their money from SVB (US$ 42b in a single day), and the US bank regulator had to declare the bank insolvent and take control of the bank.
Silicon Valley Bank's bankruptcy highlights the need for companies to review their software stack, as it provided banking services to many venture-backed technology companies in the US. The collapse of SVB could have a broader impact on the technology industry as a whole, as it is a significant source of funding for many tech startups. Its collapse could potentially lead to tightening the funding environment for these companies, meaning that some startups may struggle to raise the capital they need to grow, resulting in a slowdown in innovation and development in the industry.
As a proactive measure, it's essential for technology companies to engage in supplier relationship management and to diversify their funding sources. By building strong relationships with multiple banks and investors, companies can ensure that they have access to the capital they need, even if one of their funding sources experiences financial difficulties. This proactive approach to supplier relationship management and funding diversification can help mitigate the potential impact of events like the collapse of SVB on their supply chain, ensuring that they are well-positioned to weather any economic storms that may come their way.
How does this impact your Supply Chain?
If your supplier or supplier's supplier were banking with SVB, that could impact your supply chain. Given SVB's speciality, these suppliers are most likely to be in the technology industry, although it is possible suppliers in other industries might have been banking with SVB. There are also market rumours of a couple of P2P software providers being caught up in this collapse, so keep your eyes wide open.
A few steps need to be taken by the procurement team immediately to mitigate the impact:
- Confirm the impact
You need to contact all your key suppliers immediately to confirm whether the SVB collapse has had an impact on them or their key suppliers (which could mean asking your suppliers to contact their suppliers on a war footing)
- Ascertain the status
If any suppliers are impacted, ascertain the extent and type of impact. A supplier whose sole banker was SVB would be in much deeper trouble than another with minimal exposure.
Be aware that impacted suppliers might struggle to respond to you quickly, so a lack of response from an otherwise proactive supplier could be a warning sign.
On the other hand, if you had established yourself as a 'Customer of Choice' with your suppliers, you are much more likely to get quick, honest and up-to-date responses to address your concerns.
- Mitigation plan
For suppliers who confirm banking trouble with SVB or with those who fail to respond to you quickly, work on short-term alternative sources of supply while evaluating whether or not and what kind of help you may need to provide to your suppliers. Short-term mitigation steps should be prepared while you await replies from the suppliers to steps 1 and 2 above so that you can immediately implement your plans if needed.
For suppliers who have treated you as core customers and who you decide to support, it could mean you purchase some additional products or make early payments for goods already delivered to you, to help them tide over the hard times. Although providing money in advance to impacted suppliers could be risky at this stage, we recommend evaluating the situation fully, including the ability of the supplier to deliver the products you provide advance payments for, before making advance payments.
Remember, this unfortunate situation could create an opportunity to create an everlasting relationship with some of your suppliers for your mutual benefit. And keep in mind that your customers might be impacted too!
At State of Flux, we believe that the route to enhanced business performance is how organisations engage and support their suppliers. We specialise in designing bespoke Supplier Management programmes that assess existing supplier value while also identifying and unlocking collaborative routes to additional value for both customer and supplier organisations.