The Silicon Valley Bank Crisis 2023 is still dominating financial news headlines. Silicon Valley Bank, a financial institution best known for its connections to high-flying international technology firms and venture capital, failed on Friday as a result of one of the oldest issues in banking: a bank run or a financial meltdown.
Silicon Valley Bank Crisis 2023
In the heart of an area renowned for its technological strength and astute decision-making, Santa Clara, California, the Silicon Valley Bank was founded in 1984. Before collapsing due to poor investment decisions, the bank had grown into the 16th largest bank in the US, serving the financial requirements of tech companies all over the world.
What is the Silicon Valley Bank Crisis?
In the financial sector, stories of the Silicon Valley Bank disaster still dominate the news. The US Federal Reserve is taking heat for failing to recognize what experts claim were crystal-clear indicators that the bank was in serious danger of going under. Since Washington Mutual went under at the height of the financial crisis more than ten years ago, Silicon Valley Bank’s demise is the biggest financial institution failure. And those impacts have arrived right away. Other firms/start-ups with connections to the bank struggled to pay their staff and feared they could have to postpone their future plans, fire, or suspend employees while they wait for funding.
The Rise of the Silicon Valley Bank
In contrast to its bigger, wealthier and more established competitors, who were still lacking in a strong understanding of technology, Silicon Valley quickly became the go-to Bank for venture capitalists looking for financial partners more receptive to innovative business proposals. They were interested in sponsoring technological start-ups and had a working knowledge of startup companies and venture capital. Banking with the SVB was an easy choice because they were integrated into the fabric of the startup community. Just as the tech sector began to expand, venture investors opened accounts at Silicon Valley Bank and recommended the entrepreneurs they were funding do the same. The now-defunct Silicon Valley Bank was recently proud to be ranked among America’s top banks for the fifth consecutive year in Forbes magazine’s annual list. The bank was included in its first list of Financial All-Stars.
Why did Silicon Valley Bank fail?
Now, let us move to the big question; Why did the Silicon Valley Bank fail?
Throughout the pandemic years, SVB’s services were highly sought after as the chosen bank for the technology industry. Early in 2020, the Covid-19 market shock caused a swift shift in consumer spending patterns, ushering in a golden age for startups and established IT enterprises. There was an abundance of deposits since many tech companies used the Silicon Valley Bank to store the cash they used for payroll and other company needs. Like all banks, the bank invested a sizable amount of the deposits. Its significant investments in long-term US government bonds, notably those backed by mortgages, laid the groundwork for its eventual bankruptcy.
The start-up industry, in which Silicon Valley Bank plays a prominent part, was noticeably impacted by the Federal Deposit Insurance Corporation’s (FDIC) aggressive interest rate increases during the past year. The high interest rates, which had a limited financial impact, made it difficult for the bank to meet withdrawal demands. In addition, the bank lost $1.8 billion on Treasury bonds that lost value as a result of the Fed’s rate hikes.
But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. So when the Federal Reserve started to hike rates rapidly to combat inflation, the Silicon Valley Bank’s bond portfolio started to lose significant value. If the SVB were able to hold those bonds for a number of years until they mature, then it would receive its capital back. However, as economic conditions soured over the last year, with tech companies particularly affected, many of the bank’s customers started drawing on their deposits. The SVB didn’t have enough cash on hand, and so it started selling some of its bonds at steep losses, spooking investors and customers. It took just 48 hours between the time it disclosed that it had sold the assets and its collapse.
SVB and Technology Sector
Yet the technology industry faces more pressing issues now. The SVB catered to Silicon Valley, supporting start-ups and other such firms that conventional banks might be hesitant to support. As the economy has gotten worse, the sector has started laying off employees lately. One of the technology sector’s greatest patrons has failed just when they needed financial support.
The SVB’s downfall, which was brought on by a run-on deposit late last week, has had an impact on the Indian tech industry. More than 2,500 venture capital businesses received banking services from the SVB. This includes a sizable number of Indian businesses with US venture capital backing and a sizable portion of India’s $13 billion software-as-a-service market that caters to US customers.
Although all Silicon Valley Bank depositors have received their money back, its closure is anticipated to leave a gap in the technology industry that may be challenging to fill.
Silicon Valley Bank Crisis 2023: What Now?
The US government acted swiftly to alleviate immediate fears of a widespread outbreak by safeguarding all deposits made by bank customers. There had been worries that if that guarantee hadn’t been put in place, owners of the SVB accounts wouldn’t have been able to pay their staff, which would have had an impact on the entire economy. The longer-term question is whether other banks’ overexposure to declining bond prices is comparable to the SVB’s sensitivity to rising interest rates. The Federal Reserve has introduced a new scheme that enables banks to borrow money guaranteed by government securities in order to satisfy depositor demand in order to mitigate the risk. This is intended to stop banks from being obliged to sell securities like government bonds that have been depreciating due to rising rates.
SVB Crisis and India
The Reserve Bank of India (RBI) has jumped into action days after Silicon Valley Bank’s demise to assess its effects on Indian businesses and banks. The regulator has begun gathering data on the exposure of banks and non-banks to the collapsed Silicon Valley lender.
Over the past ten years, the US has invested billions of dollars in Venture Capital in India’s tech sector, which has also enrolled several Indian startups in incubator schemes. Indian entrepreneurs favoured the SVB because, unlike mainstream financial institutions (like JP Morgan), it permitted them to open accounts remotely. Due to the fact that almost no one predicted the bank’s failure, many startups in India are now re-evaluating how they determine their risks and will need to diversify their banking ties in both India and the US.
Silicon Valley Bank Crisis: A Lesson for All
Every company has been compelled to re-evaluate its banking and business relationships with other institutions as a result of the crisis. Entrepreneurs who had placed all of the capital for their firms in Silicon Valley Bank are now learning that it makes more sense to distribute their resources among a number of financial institutions, with the largest banks being regarded as safe havens.
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