Everything changed overnight for Silicon Valley Bank, the 16th largest lender in the USA, when, in early March, it collapsed in just a matter of 48 hours. The bank that operated on the thought of turning big ideas into great businesses and considered itself the financial partner of the innovation economy, came crashing down to the ground and left everyone contemplating the question ‘Are we heading towards a financial crisis, is all hope lost?’
The SVB debacle has sent seismic shockwaves in the business world, leaving everyone from the entrepreneurs to the investing community on a cliffhanger. The events have indeed been catastrophic as the bank share lost 80% of its total value and saw a sharp plunge of 66% in a single trading session. This further had a domino effect on other banks. Yes, banks such as First Republic, PacWest Bancorp, Western Alliance Bancorp etc, bore the brunt and witnessed more than a 40% decline in their value in a single day.
Many experts like Gary Tan, president of ‘Y Combinator’ one of the foremost names in the start-up ecosystem community, have termed it an extinction-level event for startups and are of the opinion that this will set ‘startups’ and ‘innovation’ back by at least 10 years or even more. Before we delve deep into this topic, let’s understand a bank failure.
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Banking Failure: A Major Miss on Effective Banking
A banking failure in the USA is when FDIC (Federal Deposit Insurance Corporation) takes emergency measures to protect the public’s and investors’ interests. The main role of FDIC is to maintain public confidence and stability in the country’s financial ecosystem.
In simple terms, it stops the bank’s operations and shuts it down so that the bank can get its act together. All this happens secretly without public knowledge. Because obviously, if the word leaks, only panic and worry will ensue. And nothing positive has ever come out of all hell breaking loose. As a consequential step, the FDIC monitors the situation and takes over the bank. After some time, the bank reopens, either under completely new ownership (which in the case of SVB failure, is Deposit National Bank of Santa Clara) or under FDIC’s control.
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How Did the Banking Giant Collapsed like a Pack of Cards?
If history has taught us anything, no phenomenon can be termed ‘too big to fail’. The fall of the Lehman Brothers, which subsequently led to the acceleration of the Global Financial Crisis of 2008, is a testimony to that fact. However, SVB’s downfall can be primarily attributed to a bank run, inadequate half-measures, wrong timing and much more.
A bank run typically happens when a major chunk of depositors withdraw their funds from a bank all at once, fearing its insolvency. In the case of the Silicon Valley Bank, it had invested in bonds worth billions of dollars. Usually, investing in government bonds is very safe; however, the total value of this massive investment witnessed a steep fall due to the higher yield rates, and SVB had to take heavy losses amounting to $1.8 billion.
One more thing that led to the unfortunate downfall of the SVB was its unique customer base, which largely consisted of startups and tech-centric companies. As venture capital was drying up, companies could not sustain themselves and needed more cash. And guess what? Where had they stocked up their money? At SVB! They became fearful about the bank’s financial situation and decided to take out their deposits! To match this cash-withdrawing frenzy of its customers, SVB had to sell bonds at a loss, and those losses added up, making SVB insolvent. To prevent its collapse, the bank further tried to raise fresh capital but could not do so.
SVB Fiasco: Getting out of an Economic Dilemma
Here’s a Quick Rundown of the entire SVB situation for your understanding!
- After COVID, a lot of money was pumped into the economy with the objective of reviving it. Due to this, the banks witnessed a massive surge in their cash deposits.
- With a fresh infusion of capital in the banks, they tried to maximise their gains by investing in government bonds and diversifying their investment portfolio.
- But unfortunately, the yield rates shot up. The bank had to sell its bonds at lower prices sustaining heavy losses.
- To recover from this loss, the bank tried to raise fresh capital. However, that approach too, on the SVB’s part to revive itself, failed drastically, leading to a total and final collapse.
- This further had a snowball effect leading to a typical case of a bank run (also the first digitally-induced bank run in history) where Venture Capitalists urged startups to withdraw their money.
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What’s in it for Indian Markets? Does India Need to Worry?
The collapse of SVB has sparked concerns about what lies on the cards for the Asian markets. As far as the Indian startup ecosystem is concerned, tech giants like Byju’s, Unacademy, Shaadi.com, Naaptol, and Paytm had their funds deposited in SVB. Overall, the situation is a bit complex, and it is hard to predict if the Indian financial ecosystem will take a hit as hard as the US.
A large chunk of experts are echoing that Indian markets are not in danger and that investors don’t need to worry. However, it’s still a bit early to comment on the situation. As far as global markets are concerned, we cannot outguess the possibility of these events happening in the future too, and the best that can be done is to be ready for them as and when they happen. The question still remains! Is this financial storm headed towards a volcanic eruption, or will it subside?
Only time will tell!
