Diversify your financial stack to reduce reliance on a single bank

The recent collapse of Silicon Valley Bank (SVB) and Signature Bank in the US has forced the issue of risk exposure to the forefront of business owners' minds. 

SVB is the second largest bank to fail in US history. Its collapse is a reminder of the risk of relying on a single bank. Particularly if your business holds cash reserves above the £85,000 insurance limit offered by the Financial Services Compensation Scheme (FSCS). The lesson is clear: businesses must diversify their cash pools to reduce their risk exposure.

What triggered the collapse of Silicon Valley Bank in the US?

A large portion of SVB’s customers in the US were venture-backed businesses in the tech sector. These companies saw a boom during the pandemic and SVB’s deposits grew from US$60 billion in 2020 to almost US$200 billion in 2022.

As the money flowed in, SVB invested heavily in long-term government bonds. Although traditionally seen as one of the safest types of investment, the value of government bonds declined sharply after the US Federal Reserve raised interest rates to curb inflation. 

Meanwhile, rising interest rates also squeezed the tech sector. Funding dried up as the cost of private investment increased, and SVB’s clients began withdrawing money from the bank to support their business operations. SVB’s cash reserves started running low, and the bank was forced to sell US$21 billion in securities at a loss of US$1.8 billion. They also announced that they would be looking to raise a further $2.25 billion by selling common stock and convertible preferred shares. 

This announcement spooked investors, and shares in SVB Financial (SVB's parent company) began to tumble. This triggered a lack of confidence in the bank’s stability, and SVB’s customers rapidly began withdrawing their deposits in a situation known as a ‘bank run’. Within 48 hours almost a quarter of the bank's reserves had been lost, and US regulators stepped in and seized its assets. 

SVB’s UK subsidiary, SVB UK, was affected by its parent company’s failure. As its parent company spiralled into crisis, it became clear that it too could face liquidity issues if enough of its customers withdrew their cash deposits. As customers began to pull their deposits following events in the US, UK regulators stepped in and froze the bank. 

Did the Government bailout Silicon Valley Bank?

The Bank of England had planned to put SVB UK into insolvency. However, its 3,300 UK clients (comprised mainly of startups and venture capital firms) warned that this move would trigger a crisis in the UK tech sector. In response, the Bank of England and the UK government worked through the weekend to secure a rescue deal. 

On Monday 13th March, SVB UK was bought by HSBC for £1. This deal means the government will not have to step in to protect depositors. 

The Federal Reserve did not bailout SVB in the US either, and no losses from the resolution of SVB will be borne by the US taxpayer. However, to mitigate the fallout of the bank’s collapse in the US, the Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation agreed to guarantee all deposits at the bank. This means that SVB’s customers will get their money back.

Diversify to reduce your risk exposure

The collapse of Silicon Valley Bank is a stark reminder of the inherent risks of any financial system. Whilst there are some measures in place to protect customers’ funds when banks fail, these schemes only insure deposits up to a certain amount. 

In the UK, deposits are insured by the Financial Services Compensation Scheme (FSCS) up to £85,000. That means businesses and individuals that hold deposits above £85,000 in a single bank account are left exposed should their bank fail. The best way to protect yourself from risk is to spread your cash reserves across several financial institutions.

How Airwallex can help

Airwallex is not a bank, although we share many features with banks. We offer multi-currency accounts, money transfers, foreign exchange, payment acceptance and more to global businesses. However, there are some key differences in how we store our customers' money. 

When you deposit funds into an Airwallex business account in the UK, those funds are held in a separate safeguarded account on your behalf. The money in this safeguarded account is not available to Airwallex’s creditors, our banks or third parties. It cannot be lent or used for other purposes, such as to fulfil operational needs or to invest in assets. That means that whenever you wish to withdraw money or make a payout from your Airwallex account, that money will be available to you.

Businesses can hold balances in several currencies in their Airwallex account. However, funds are always held domestically for legal and regulatory purposes. That means that if you are a UK customer, your deposits will be held and secured in the UK. If you’re looking to reduce your risk exposure, an Airwallex business account can offer you the ability to secure funds in excess of the £85,000 guaranteed under FSCS regulation. It’s one of many reasons thousands of businesses choose to hold money with us.

Our team is working around the clock to support businesses by fast-tracking applications for our global business account during this difficult time. If you’re interested in joining Airwallex, you can sign up for a business account here.

Airwallex is licensed as an Electronic Money Institution (EMI) by the Financial Conduct Authority (FCA) in the United Kingdom and the Dutch National Bank in the Netherlands.