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Why blockchain could have saved Silicon Valley Bank

Banks must be trusted, but trust requires transparency

people, queue, SVB Reuters/Brian Snyder
Leerink will acquire the investment banking business for a combination of cash and repayment of an inter-company note

Born in a garage 40 years ago, Silicon Valley Bank started life offering banking services to Cisco and Bay Networks before growing rapidly to become the go-to bank for technology, life sciences and innovation. 

By last week it was the 16th-largest regional bank in the US with operations across 13 countries, and each country responsible for its own bank stability. 

Full disclosure, my company banked with SVB – mainly to benefit from its wider tech network.

SVB was the fourth bank implosion that I have seen during my career. The first, Baring Brothers, went insolvent in 1995 as a result of concealed trading losses by Nick Leeson and then sold to ING Group for £1. 

Then UK high street bank Northern Rock was nationalised in February 2008 after depositors rushed to withdraw cash following news of its tight liquidity position requiring government support. 

Then there was the collapse of Lehman Brothers in September 2008, leading to a series of accelerated bailouts by governments to prevent a global freeze of the financial markets. 

At the time of its collapse, Lehman was the fourth-largest investment bank in the US, with $639 billion in assets and $613 billion in liabilities. While not a high street bank, it was considered to be such a systemically important stakeholder in the global financial system that its downfall required global action.

(Further disclosure, I was an employee of Lehman until October 2002.)

The macro environment has also claimed scalps in crypto land, with Silvergate Capital and Signature Bank becoming insolvent last week. Both grew deposits rapidly during the crypto gold rush and have struggled since it stopped.

While the crypto ecosystem has been through huge volatility, it’s still valued at more than $1 trillion. Since the blow-up of FTX, bitcoin has risen by some 55% and since Friday (when SVB collapsed) it is up nearly 30%.

We have come a long way since 2008 but the same reliance on a trust-based model remains. Trust is critical for the banking model to function.

Barings, Northern Rock, Lehman’s and SVB all failed because of a sudden loss of trust that placed a demand on their liquidity position. When trust goes, customers demand their money back immediately. 

This model of banking goes to the very heart of their business model: taking deposits and making loans and then capturing the difference in price (the interest rate) between these activities to make a profit for the shareholders. 

The problem for SVB arose when the size of its deposit book (requiring interest to be paid) became significantly greater than the size of its loan book (where interest is received) and therefore the bank couldn’t make enough returns for its shareholders.

Bank regulation, management and monitoring has been significantly strengthened since the 2008 financial crisis, supported by regular stress tests. 

However these may not be regular enough, and there may be a case for banks to report liquidity measures daily in a transparent way. Transparency, after all, drives trust.

A blockchain database of information, from audit to financial statements to market, would power the banks’ transparency and integrity.

It would minimise risk, reduce costs and provide wholesale visibility of all the information in every corner of a financial statement. 

Consider the difference between JP Morgan and a regional bank in the US: the latter fighting to regain trust, even though its business operations bore no comparison to SVB. Blockchain is the answer. 

More validated immutable information would generate trust in what banks are managing themselves and why they are asking us to trust them.

What is finally presented to investors can be traced back to its verified source, and if investors trust what they hear, they will reward its source with a higher valuation. 

Furthermore, a real-time report of liquidity position could help depositors to make choices with their feet and put the emphasis on bank management to ensure they prioritise bank strength versus bank profitability. 

Ultimately, trust requires transparency to validate integrity. 

Incorporating blockchain into the reporting framework, stress tests and bank auditing could provide that much-needed transparency – and perhaps even prevent another bank from blowing up.

Nish Kotecha is a serial tech entrepreneur and board professional. He is the exec chair and co-founder of Finboot and non-executive chair of Agam

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