From startup saviour to sudden collapse: Decode the story of Silicon Valley Bank and its impact on Indian companies!
Imagine a bank that was once the go-to choice for half of all US venture-backed startups. It was also a trusted financial partner to the venture capitalists who had funded these startups.
Now imagine this same bank collapsing in just 48 hours, leaving the startup world scratching their heads. This is the story of Silicon Valley Bank, the 16th largest bank in the United States. Its downfall is the biggest US lender failure since the 2008 financial crisis.
Let’s unveil the mystery of what led to this massive downfall and explore the ripple effects it can have on Indian companies!
What’s Happening?
Silicon Valley Bank’s parent company fell into tragic circumstances in just a few days last week. The company’s stock plummeted by over 60% on 9th March 2023 and fell further on Friday, 10th March 2023.
That’s not all, you would be surprised to know that the stock had hit a 52-week high of nearly $600 per share, and on 10th March, the stock was trading for $106!
That is a dip of a whopping 82.33%!
This makes Silicon Valley Bank the next largest bank to collapse after Washington Mutual Bank’s downfall during the subprime mortgage crisis in 2008. Finally, this downfall ended as the market regulator closed the bank, leaving its future uncertain.
What is the Mystery Behind the Downfall of the Silicon Valley Bank?
To understand the mystery, you need to understand the operating model of Silicon Valley Bank.
The Silicon Valley Bank is a renowned bank for startup companies. When a startup raises money, it may use a little money from the amount raised and keep the rest in the bank. Now, the bank itself claims that nearly half of all US venture-backed startups and 44% of the US venture-backed technology and healthcare companies that went public in 2022 are the clients of Silicon Valley Bank. With such high-profile clients, it’s no surprise that the bank’s assets and deposits nearly doubled in 2021, according to the Wall Street Journal.
Yes, the bank had a high inflow of deposits, but they were fewer borrowers, which made the bank face a significant challenge in generating profits.
Now we all know how a bank makes profits, takes deposits and gives out loans, and keeps the difference. But, the problem that SVB faced was that there were fewer borrowers, and they had huge deposits.
The bank won’t make profits just by gathering deposits, right?
The Silicon Valley Bank had to get creative with its excess funds. The solution? Invest in safe, held-to-maturity securities to earn a return on its deposits. Problem solved! Everything was good.
Unfortunately, the bank’s strategy backfired when interest rates skyrocketed in 2022 and 2023. The value of the bonds in which it had invested plunged. This is a characteristic of bonds; when interest rates increase, bond prices decrease.
On the other hand, startup companies found that the cost of borrowing was rising, so instead of borrowing new money, they went to the bank to withdraw their deposits, but their deposits were invested in the bond, which was now in losses. Hence, the bank had to sell its bonds at a $1.8 billion loss.
Now after the huge loss, they could not raise capital to offset the loss, and their stock began to dip. As a result, leading venture capital firms advised their invested companies to withdraw their deposits from Silicon Valley Bank. This caused a snowball effect, and the regulators had to intervene and close the bank to safeguard depositors.
The once-revered Silicon Valley Bank had fallen, proving that even the most innovative strategies can have dire consequences.
Is This An Indication of the 2008 Financial Crisis Coming Back?
The 2008 financial crisis occurred due to the collapse of mortgage-backed securities tied to risky housing loans, leading to a breakdown in the global financial system. However, the Silicon Valley Bank’s recent downfall was due to a cash crunch and panicked customers withdrawing their deposits. Therefore, it is not an indication of the 2008 crisis repeating itself.
How Will it Impact India?
When the Silicon Valley Bank closed, the Federal Deposit Insurance Corporation (FDIC) secured all deposits and transferred them to the Deposit Insurance National Bank of Santa Clara (DINB), ensuring the safety of depositors’ money. However, many Indian startups have parked their funds with the Silicon Valley Bank. One of these companies is Nazara Technologies. They have claimed that their $7.75 million, or Rs 640 million is with SVB under the name of two of their subsidiaries.
Now, with the downfall of Silicon Valley Bank, these companies cannot access their money leading to a cash crunch, and hence they might even face difficulty in meeting their obligations.
Moreover, just as our Indian law states that Rs 5 lakh deposits are insured, similarly, as per the US rules, $2,50,000 of a person’s bank deposit is insured, but startups have millions of dollars deposited in the bank.
What about them? The question remains unanswered.
PS: According to Hindustan Times, the recent news states that HSBC has bought the UK arm of Silicon Valley Bank for Rs 99 (£1) and gets deposits worth US$ 8.1 billion!
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The stocks mentioned in the article is for informational purposes. This is not investment advice.
