Silicon Valley Fiasco

Posted On - 27 March, 2023 • By - Shivam Shekhar

Picture Containing text Silicon Valley Bank

Silicon Valley Bank (“SVB”) failed in March 2023, marking the largest bank failure since the 2008 Financial Crisis, which was closed on March 12, 2023, by California Department of Financial Protection and Innovation (“CDFPI”). The bank was subjected to an unanticipated bank run and capital crisis, which resulted in its collapse and takeover by federal regulators. SVB’s problems began with a big loss on the sale of securities, which was exacerbated by its attempts to acquire capital in order to meet its liquidity needs. Consequently, depositors began to withdraw their funds, increasing SVB’s financial difficulties.

The Federal Deposit Insurance Corporation (“FDIC”) was appointed as a receiver by CDFPI, which further established the Deposit Insurance National Bank of Santa Clara to take over SVB’s insured deposits in the interests of the insured depositors.

The FDIC, on March 13, 2023, transferred all deposits, both insured and uninsured, and substantially all assets of SVB to a full-service FDIC-operated ‘bridge bank’ in an action to remedy the situation and protect the depositors of SVB. This bridge bank, known as, Silicon Valley Bridge Bank, N.A., intended to resume standard banking services and despite the gravity of the situation, banking operations restarted on March 13, 2023. The following is a timeline of events that led up to the collapse:[1]

Timeline

March 8, 2023: SVB Financial Group announced it had sold $21 billion of securities from its portfolio at a loss of $1.8 billion.
March 9, 2023: SVB shares fell 41%, the most since 1998 when the company announced that it had sold securities at a loss.
March 12, 2023: SVB was closed down by CDFPI. SVB’s assets were seized, and the deposits of its customers were moved to other aforementioned banks.
March 13, 2023: The FDIC established the Deposit Insurance National Bank of Santa Clara to take over SVB’s assets and liabilities, and banking operations restarted no later than this day under Silicon Valley Bridge Bank, N.A.

SVB Powers 2021’s Tech Startup Boom

The startup ecosystem witnessed a revival in 2021 as a result of increased investment and innovation in the tech industry. Many startups experienced substantial growth and success, with some even approaching unicorn status. SVB played an important role in this development, functioning as a main financial partner for several tech entrepreneurs. As a result, several of these firms set up their funds with SVB, relying on its knowledge and resources to navigate the tricky world of startup funding. With SVB’s assistance, tech businesses were able to get investments, expand their operations, and accelerate their growth.

SVB’s Bond Investment: Lessons Learned

In the months running up to its failure in 2023, SVB had made considerable investments in US Treasuries bonds, which they had to sell, in order to meet the withdrawal requirements of their depositors, resulting in a major loss for SVB. SVB’s large-scale investment in US bonds demonstrates the complexities of financial risk management and the issues that institutions like SVB face. Despite its efforts to diversify its portfolio and protect itself against potential losses, SVB was unable to avoid failure. As a result, SVB’S failure serves as a cautionary tale for other financial organizations, emphasizing the importance of robust risk management techniques in the banking business.[2]

Cash-Crunch Takeover

SVB faced financial difficulties as a result of higher interest rates by the Federal Reserve, which were implemented to combat inflation and the funding winter. Furthermore, the cash burn from start-ups led to a decline in consumer deposits that were less than expected. In response, SVB announced intentions to sell $1.75 billion in stock and reinvest the proceeds in shorter-term debt. Subsequently it sought to double its term borrowing to $30 billion. Following this, SVB’s stock price fell by 60%. Regulators took over SVB Financial during the cash crunch due to the bank’s major tech borrowers rapidly depleting their capital.[3]

Implications For Global And Indian Tech

This collapse has had a significant influence on the Indian tech industry, which is SVB’s largest customer, with a huge number of Indian entrepreneurs, particularly in the SaaS sector. The unexpected collapse of SVB has sent shockwaves throughout the tech sector and may have a significant influence on global tech growth. While it is unclear how this would affect the Indian banking system, it is predicted that the collapse of SVB will have a ripple effect on Indian entrepreneurs. Following SVB’s collapse, tech, and fintech equities had some of the steepest drops in the public market.

What’s next?

The collapse of SVB in March 2023 sent shockwaves through the banking industry, raising questions about its stability and potential economic effect. SVB has seen an increase in deposits at a period when interest rates were low, and its clients had plenty of cash. However, its abrupt collapse has caused market volatility and a rush of depositors to withdraw their assets. While some experts have raised alarm about the financial system’s instability, it is still unclear if this would result in a recession.

As repercussions, hundreds of tech firms faced the prospect of laying off employees or closing down entirely. The Bank of London has taken steps to aid UK entrepreneurs with SVB accounts, but it is unclear whether similar steps have been taken elsewhere. Start-up founders who have been unable to access their SVB accounts are becoming increasingly concerned about the future of their companies. The collapse of SVB has further compounded the funding issues that startups were already facing, adding to the ecosystem’s uncertainty. It remains to be seen what steps will be taken to assist affected startups, as well as whether other banks would step up to fill the hole created by SVB.[4]

[1]https://www.fdic.gov/news/press-releases/2023/pr23016.html
https://www.fdic.gov/news/press-releases/2023/pr23019.html
https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley.html
https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley-faq.html

[2]https://www.reuters.com/business/finance/what-caused-silicon-valley-banks-failure-2023-03-10/.

[3]https://financialpost.com/pmn/business-pmn/silicon-valley-bank-to-sell-stock-to-cope-with-cash-burn.

[4]https://www.forbes.com/sites/greatspeculations/2023/03/11/the-silicon-valley-bank-insolvency-and-the-oncoming-recession-blame-the-fed/?sh=19c395547389.

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