EXCLUSIVE: “Lemmings don’t run off cliffs… intentionally, anyway” – Sue Scott in ‘The Fintech Magazine’

Sue Scott ponders if technology could accidentally exacerbate banking crises?

I was sitting in a Soho bar on Coronation Day, talking to a tech entrepreneur about Silicon Valley Bank. As the jazz duet played a little too loudly behind us, he told me how he’d emptied his SVB UK business account in March, when news reached him that the US parent ‘bank for the innovation economy’ was on the point of collapse. How he’d had to explain to – albeit very understanding – investors that the cash was now sitting in his personal account, held with another provider, until they figured out how badly exposed the UK arm of SVB was.

He’s an intelligent chap: he knew that he’d contributed to a run on SVB UK that, ultimately, would see it sold to HSBC in a Bank of England-brokered deal for £1 just a few days later. At which point, he returned the money to the bank. So, one afternoon in March 2023, SVB UK was the custodian of around £11billion on behalf of 4,000 or so business customers; by close of play the following day, many of them – spooked, like my drinking pal, by the knowledge that they had more sitting in their account than would be covered by the UK’s Financial Services Compensation Scheme if the bank failed – had withdrawn more than £4billion between them. SVB UK’s fate was sealed.

Under the Bank of England’s ‘resolution’ procedure, introduced after the financial crash in 2008, for a bank the size of SVB UK things would go one of three ways: a sale/transfer to another bank – and fast; a ‘bridge bank’, organised by the Bank of England, would take over the running of SVB UK’s core functions until a deal was done or it was wound down; or (nuclear option) the bank would be declared insolvent immediately, thousands of its bigger business clients would lose a heck of a lot of unprotected money, and the taxpayer would be left with a stonking compensation bill for the rest.

It begs the question: if everybody had just sat tight, could SVB UK have been safely detached from its parent bank and survived intact? Perhaps.

But panic has its own momentum and you can’t blame founders wanting to protect their assets and the interests of investors– not to mention the welfare of staff whose pay cheques they might otherwise not have been able to meet at the end of the month. Bank runs are a regulator’s worst nightmare. And yet technology appears to be conspiring to make them more likely – not less. Elsewhere in this issue, SmartStream reveals that it’s actively looking at using its AI to detect subtle changes in patterns of bank behaviour that could raise a red flag for SmartStream clients who are among its counterparties.

While the decision on what to do as a result of receiving such a signal rests with a human, the immediate response, in the interest of self-preservation, is likely to be to stop transacting until further inquiries have been made. Thus, if enough red flags are raised at the same time, a non-critical event that could have been caused by any number of factors, including human error, could be turned into a major and possibly fatal incident for the bank.

SESAMm, the AI-driven award-winning French startup that started as a student project nine years ago and recently closed a €35million Series B funding round, keeps track of potential controversies and positive-impact events on companies around the world by trawling 20 billion articles and 10 million new documents on the internet daily. It then applies a series of filters, including, among others, risk, sentiment and severity, to come up with bespoke analyses for its clients.

“There is, as yet, no technology that prevents lemmings running off cliffs, which isn’t – as the Disney myth-makers would have us believe – because they are seized by a collective impulse to self-destruct”

They tend to be major private equity firms, asset managers, index providers and global corporations who are increasingly interested in sentiment indicators to keep them ahead of financial markets. Sylvain Forté, co-founder and CEO of SESAMm, told me that it had started to pick up signals as early as January that a run on SVB in the US was possible – long before regulators – and most of the rest of us – were aware that anything was untoward.

“It was more reputational indicators. There was a dip in sentiment, particularly on social channels, like Twitter. I’m not saying we predicted the collapse, but [what we saw] was interesting,” he says.

“We’re seeing more and more demand for risk monitoring in general, even of suppliers and clients. And SVB was a supplier to a lot of corporates.”He’s keen to stress his technology should be seen as guiding management decisions. “It may indicate a need for exclusion or portfolio rebalancing, but it’s not a replacement for decision-making,” he says.

Nevertheless, the impact of AI in both use cases – transaction monitoring and sentiment analysis – is clear. It gives a competitive advantage to those employing the technology – and, as a business leader, who wouldn’t want that? But it could also amplify any negative response to signals that might turn out to be benign. And, as we’ve seen, even if they are noteworthy, the speed with which panic sets in is already systemically alarming.There is, as yet, no technology that prevents lemmings running off cliffs, which isn’t – as the Disney myth-makers would have us believe – because they are seized by a collective impulse to self-destruct.

Rather, environmental signals – in their case of over-population – trigger them to up-sticks and move all at once. In the rush, there are fatalities, which perhaps could have been avoided if they’d moved slower or taken time to consider alternatives to mass migration, or, indeed, if the Chief Lemming had put rules around such things. As regulators in the UK and US separately consider how to legislate for unintended consequences of AI, and especially how those might affect financial services, it’s worth thinking about those lemmings.

DEATH OF A BANK

MARCH 8 In a statement to stakeholders, SVB in the US says it’s taken ‘strategic actions to strengthen our financial position’, which includes a share issue to raise around $1.75billion on top of a $500million investment pledge by one of its clients. It also sells its bond portfolio at a $1.8billion loss. The bank insists: “Our financial position enables us to take these strategic actions. SVB is well-capitalised, with a high-quality, liquid balance sheet and peer-leading capital ratios.” Credit ratings agency Moody’s downgrades its outlook on SVB from stable to negative.

MARCH 9 SVB’s CEO Greg Becker calls on VC firms to ‘stay calm’ following a flurry of memos and Twitter posts by startup investors forecasting its collapse. Customer withdrawals continue apace and its stock plunges 60 per cent. SVB UK customers begin panic withdrawals.

MARCH 10 SVB becomes the biggest bank crash in the US since the Great Financial Crisis. The regulator places it into receivership and $175billion in customer deposits are put under its control. Signature Bank, another business bank, mainly servicing real estate and law firms but which also banks crypto clients, starts haemorrhaging deposits. The Bank of England intervenes to prevent a disorderly collapse of SVB UK.

MARCH 12 US regulators close Signature Bank. New York Community Bancorp will acquire ‘certain financially and strategically complementary parts of Signature’ a fortnight later.

MARCH 13 HSBC agrees to buy SVB UK for £1. Its London-based staff will stay in their jobs and run the bank from its existing offices. HSBC will go on to hire former SVB staff in the States for a new business, supporting tech companies and their investors – a move that will later see it sued by SVB’s new owner.

MARCH 16 Eleven of the biggest US banks inject a total of $30billion into teetering First Republic Bank

MARCH 27 US-wide bank First Citizens acquires SVB in the States. MAY 1Regulators close First Republic and sell it to JPMorgan Chase.

MAY 2 HSBC’s Q1 results show a $1.5billion boost from the SVB UK takeover. “In the weeks that have passed since the time of doing the deal there have been no nasty surprises,” says group CEO Noel Quinn. “The UK business was well run and had a good portfolio of customers.”

This article was published in The Fintech Magazine Issue 14, Page 13-14