Silicon Valley Bank Failure and Its Impact on India
đInsightsOn March 10, 2022, the entire business world woke up to this shocking news from the Federal Deposit Insurance Corporation (FDIC),
"Today, Silicon Valley Bank, located in Santa Clara, California, was shut down by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corporation (FDIC) has been designated as the receiver in this case.â
This news sent shockwaves throughout the sector. This was the largest bank to have failed since the 2008 financial crisis & the second largest in the history of the US. This created huge chaos in the financial market because the shutdown of a bank as large as SVB would mean a very large situational crisis for businesses all over the world.
About the SVB
Chronology of the Events Leading to the Downfall
Impact on India
Current Status
About the SVB
Nestled in the heart of innovation and techie dreams, Silicon Valley Bank stood as the financial bedrock of the world's most dynamic and groundbreaking industries.
Since its inception in 1983, SVB has been one of the largest banks in the USA with more than $200 billion in assets. Silicon Valley Bank is a venture debt provider that specializes in funding tech startups all over the world.
As the financial pulse of the tech mecca, SVB had greatly adapted to the fast-paced rhythms of Silicon Valley.
This financial powerhouse had been more than a bank to the startups; it was a strategic partner, a mentor to startups, and a catalyst for entrepreneurial success.
With a client list like Tesla, Uber & LinkedIn, SVB had carved a niche as the go-to financial institution for the ever-evolving needs of the tech community. In 2022, Forbes named SVB among Americaâs best banks.
Chronology of the Events Leading to the Downfall
Just like the many other important events of the past decade, this too had its genesis in the pandemic. Adding fire to the flame was the Ukraine-Russia war.
Letâs dig deeper into its roots.
The Pandemic
As the pandemic hit and the whole world came to a standstill inside the four walls, the software industry was one among the few others that remained largely unaffected.
This turned the attention of the venture capitalists towards this industry. This resulted in the tech startups raising a huge sum of money in 2021. These venture capital investments nearly doubled year-over-year to around $329 billion in 2021.
This further resulted in banks holding a lot of deposits including the SVB. According to data by Bloomberg, it was estimated that as of March 2021, SVB had jumped to $124 billion from $62 billion in the previous year.
On the other hand, due to the pandemic, the interest rates have gone too low. SVB wanted to make use of this situation & provided high-interest rates to the depositors at around 2.33% while other banks like Bank of America were giving an interest rate of 0.96%.
This also resulted in many big businesses depositing their money with SVB resulting in a huge influx of cash.
As a result, SVB invested heavy sums of money in long-term bonds for its Hold to Maturity (HTM) portfolio with 10 years of maturity.
Everything was smooth until the next major factor came in.
Ukraine-Russia War
The war led to an energy crisis all over the world leading to a high inflation rate. According to the Bureau of Labour Statistics, inflation in the US peaked at 9.1 % in 2022. So, as the usual financial procedure goes, the interest rates skyrocketed to 4.33%.
This led to the lowering of bond values affecting the values of bonds bought by SVB. Also due to high interest rates, businesses, instead of opting for loans for their financial needs, started withdrawing their deposits from the bank. This led to billions of dollars being withdrawn from the bank at the same time.
To address this liquidity crisis, SVB had to sell a $ 21 billion bond portfolio at a $1.8 billion loss.
As the news spread, this led to a situation of bank-run further creating a sense of fear in the whole business world and the stocks of SVB plunged by 60% in a single day. As a result, SVB couldnât carry on further with its banking activities.
Eventually, the Federal Deposit Insurance Corporation (FDIC) took over and created a new bank called the National Bank of Santa Clara to continue the business activities further.
Impact on India
The Indian Government and the economists had assured that there wouldnât be much of a contagion effect on the Indian market due to the collapse of SVB.
Sakshi Gupta, Deputy Vice President of HDFC Bank says, âThe SVB collapse is unlikely to turn into a systemic risk. Indiaâs banking system exposure to the SVB collapse is low and the health of the banking system remains soundâŚ.â
That said, we need to understand that some sectors including our tech-based startups and IT firms will be affected to some extent.
For example, among the startups, specifically those that were funded by the American incubator, YCombinator will have to face the consequences of the collapse. Thatâs because about 60% of the YCombinatorâs startups in India have exposure to SVB.
Also, this collapse might slow down the funding that the whole startup ecosystem has been getting & result in an overall slowdown of the sector.
Another important factor to consider is the decline in overall confidence that the public has in the banking system resulting in a drop in deposits & other banking activities.
As far as SVB's Indian clients are concerned, their priority should be to determine how exposed they are to the bank and take the necessary precautions to safeguard their assets and enterprises. This may include getting legal help, revisiting loan terms, and looking for other finance and investment options.
Current Status
Currently, Silicon Valley Bank is operating as a division of the First Citizen Bank
Conclusion
The downfall of a bank as big as SVB is a reminder of the significance of prudent risk management and investing methods, particularly in the financial industry. It also emphasizes the importance of policymakers carefully considering how their choices would affect the financial sector and the overall economy.
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