Image Source : AP Silicon Valley Bank collapse causes shockwaves across world; will it impact Indian startup ecosystem?
Silicon Valley Bank collapse: The sudden collapse of Silicon Valley Bank (SVB) in the United States has caused shockwaves around the world. California-based Silicon Valley Bank, the 16th largest bank in the US, was closed on Friday (March 10) by the California Department of Financial Protection and Innovation which later appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver.
From Californian winemakers to startups on the other side of the Atlantic, businesses are attempting to handle their accounts after their bank abruptly closed down Friday. According to reports, the financial crisis is causing anxiety for corporations as well as for all their employees whose paychecks can be affected by the commotion.
The FDIC, in a statement, said as of December 31, 2022, the Silicon Valley Bank had approximately USD 209 billion in total assets and about USD 175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The number of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
What led to SVM’s bankruptcy?
It should be noted here that Silicon Valley Bank was badly affected by the Federal Reserve’s aggressive plan to raise interest rates to combat inflation along with the decline in technology stocks over the past year. The bank had bought billions of dollars worth of bonds over the years using customer deposits. This is what banks usually do.
These investments are generally safe, but as interest rates rise, the value of these investments has fallen because they were getting less interest as compared to today’s higher interest. Normally this is not a problem, as banks invest for the long term. But things can change when they have to sell in an emergency. SVB’s clients were largely startups and other tech-focused companies, which have been struggling for cash over the past year.
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As per reports, venture capital funding was drying up and companies were not able to get additional funds for unprofitable businesses. So they had to use their existing funds, which they usually had deposited in a Silicon Valley bank. Subsequently, clients from Silicon Valley began withdrawing their deposits. Initially, this was not a major problem, but later the bank started receiving requests from customers for withdrawals. Later, the bank was forced to sell its assets to meet these requests and selling the bonds at a loss effectively bankrupted the Silicon Valley bank.
SVB serves as financial gateway for venture capital-backed companies
Silicon Valley bank was not a small bank, it’s the 16th largest bank in the US, holding $210 billion in assets. It acts as a major financial conduit for venture capital-backed companies, which have been hit hard in the past 18 months as the Federal Reserve has raised interest rates and made riskier tech assets less attractive to investors.
SVB’s collapse could impact Indian startup ecosystem: Experts
Meanwhile, the collapse of Silicon Valley Bank, the largest vendor in the startup ecosystem, is likely to adversely impact the Indian startup scenario as well as it has injected a lot of uncertainty in the sector overnight, industry experts say. “Hopefully the matter will get resolved, but I think it is a big hit for Indian startups,” Ashu Garg, a prominent Silicon Valley-based venture capitalist and early-stage investor for over two decades, told PTI in an interview.
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The biggest collapse of a financial institution over a decade
It is being termed as the biggest collapse of a financial institution since the collapse of Washington Mutual a decade earlier. Silicon Valley Bank accepts deposits and lends money to high-risk startups. Due to the pandemic, startups have experienced slower growth and struggled to raise funding from venture capitalists. This resulted in startups not paying back to SVB hence leading to an increase in loan default.
The Federal Reserve System hiked interest rates that increased their borrowing costs which brought down their profit. Hike in interest rates also made banks’ bonds less valuable which prompted them to sell the bonds at loss. Meanwhile, a group of Silicon Valley-based venture capitalists after a meeting to discuss the aftermath of the bank’s downfall said the events that unfolded over the last two days have been deeply disappointing and concerning.
(With inputs from agencies)
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