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Silicon Valley Bank (SVB) collapse – what’s happened and does it matter?

We explain what’s happened with the Silicon Valley Bank collapse and what it could mean for you.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

On Friday, 10 March, Silicon Valley Bank (SVB) was closed by regulators, marking the largest US bank failure since the Global Financial Crisis in the late 2000s and second largest in US history. After the news broke, trading in SVB's shares was halted.

How did SVB collapse?

SVB was the go-to bank for small, higher-risk start-up companies. These companies were flooded with investors’ money during the pandemic and they deposited that money with SVB.

But it was too much money for SVB to handle, and it couldn’t lend it all out. With the aim of making slightly better returns on those large deposits – the bank invested a large chunk in longer-term US government bonds. They appeared to be little-to-no-risk investments, giving the bank the chance of better profits at almost no cost.

The problem is, this only worked while interest rates stayed low. But they didn’t.

The era of cheap money came to an end as inflation soared and central banks hiked interest rates sharply. Higher interest rates caused bond yields to rise, and the price of those bonds fell.

As tech companies burnt through cash and found it much harder to raise new funding from investors, they pulled money from deposits at SVB.

Management was forced to sell of a tranche of its bond portfolio at a steep loss ($1.8bn), and needed to raise $2.25bn to boost its finances. However, the planned equity raise got the cold shoulder from investors.

In just hours, customers lost confidence and started pulling money making the bank insolvent, and its UK arm also precarious.

The rescue package

Bold regulatory support in the US guaranteeing all depositors money and the purchase of the UK SVB arm by HSBC has quelled fears of a wider tech crunch. There’s also now an expectation that the Federal Reserve will press pause on rates or move more slowly to ensure financial stability, which could help calm markets.

But, there are still worries about further fallout for other small US banks, if depositors withdraw money in the search for higher returns elsewhere, particularly in the bond markets.

There’s some expectation that the US treasury could be forced to step in again and guarantee more deposits.

However, risks of a systemic failure are low due to far more diversified assets larger banks rely on and the greater capital buffers built up since the financial crisis.

What does it mean for HL savers?

SVB bank wasn’t one of our partner banks available on the Active Savings platform, so no Active Savings money was held with SVB bank.

However, we understand the news last week that SVB failure might cause some of our clients’ concern.

It’s important to understand that the problems that led to the collapse of SVB aren’t ones that impact UK retail banks. They don’t take the same risks and have been heavily regulated to prevent widespread collapse of the banking system and protect clients’ money.

UK banks are also in a much stronger position these days, with more cash reserves to meet regulatory capital requirements.

Some savers might be concerned about how we keep your savings safe and secure. That’s why we want to help you understand how your money is protected when you use Active Savings.

An introduction to the FSCS

The Financial Services Compensation Scheme (FSCS) is an independent organisation, set up by parliament, which can step in to pay compensation if authorised firms, like a bank, fail. The limit is £85,000 of eligible deposits per person, per banking licence. So, if you have money with different banks and building societies who share the same licence, you’ll only have a total of £85,000 protection through the FSCS. And on a joint account you’d have up to £170,000 protected.

If you split your money across banks and building societies who don’t share a banking licence, you’ll have higher protection. All of the banks and building societies on Active Savings are covered by the FSCS and none of them currently share a banking licence with each other.

Visit the FSCS website to find out more

While these sums might have been a drop in the ocean for worried tech companies needing to pay staff or suppliers, for the average saver it provides a big dose of reassurance.

How the money in your Active Savings account is protected

Active Savings is part of HL Savings Ltd. We’re authorised by the Financial Conduct Authority (FCA) as an electronic money institution, but we’re not a bank.

Any money you pay into your Active Savings account goes into the cash hub while you choose your savings products. When you take money out of a savings product, it then goes back into the cash hub while you decide what to do with it.

In the unlikely event that HL Savings Ltd fails, money in the cash hub isn’t covered by the Financial Service Compensation Scheme (FSCS). To keep your money in a safe place, so it’s paid back to you if we fail, we follow FCA guidelines, called safeguarding. This means keeping money in the cash hub in a segregated bank account, currently with Barclays Bank plc. It’s separate to our own company money and held under trust, so creditors can’t access it.

There’s no limit to how much of your money is protected through safeguarding. Some costs could be taken by the administrator or liquidator if we were to fail, impacting the amount that you get back. It could also take longer to get your money back than you held it directly with a bank.

If Barclays Bank plc fails the FSCS will cover up to £85,000 of your eligible deposits in the cash hub. If you hold money with Barclays outside of Active Savings as well, either directly or through other providers, this might also fall under the same £85,000 limit.

How your money in a savings product is protected

When your money is in a savings product through Active Savings, it’s held by that bank or building society. If the bank or building society were to fail, the FSCS will protect up to £85,000 of your eligible deposits.

This limit applies to each banking licence. For example, if you have savings products through Active Savings under three different banking licences, you would be protected up to £85,000 in each. If you hold money directly with one of the banks elsewhere, this would fall under the same £85,000 limit for that bank.

When using Active Savings, it could take longer to receive your money from the FSCS than if you saved directly with the bank or building society. But as a guide, the FSCS aim to make all payments back to savers within three months.

If HL Savings Ltd fails, as your money is held by the bank or building society who provides the product, it won’t be affected if we go out of business, although it could take longer to get back than if it was saved directly with the bank.

Find out more about how we keep your money safe

How safe is your investment?

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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