First the pandemic and now inflation, war, rising interest rates, supply chain disruption, and more for banks globally, the combination of macroeconomic volatility and geopolitical disruption in 2022 overturned many assumptions and ended more than a decade of relative stability. Conforming to the continuing disruption, on March 10, 2023, the Silicon Valley Bank (SVB) failed after a bank run, marking the second-largest bank failure in United States history and the largest since the 2008 financial crisis. SVB, the 16th biggest bank in the U.S., had been operational for 40 years and was considered a reliable source of funding for tech startups and venture capital firms.
After the onset of the coronavirus pandemic, it wasn't only masks and sanitizer that had spikes in demand. Many spending habits changed wildly, and the stay-at-home economy was heating up. As new market opportunities became clear, startups rapidly pivoted to meet these emerging consumer demands and the tech sector startups experienced an immense period of growth. Between 2019 and 2021, the level of venture capital funding exploded meaning startups receiving tons of cash, and subsequently depositing them with SVB. Moreover, SVB itself offered interest rates higher than the national average to lure the depositors which actually boosted its deposits by 25% in 2020! The higher interest rates offered by the SVB prompted depositors to move their funds from other banks to SVB to earn higher returns.
Capitalizing on the resultant increase in the deposits, SVB invested in long-term Treasury bonds leading to a loss of short term solvency. Adding to this the market value of these bonds decreased through 2022 and into 2023 as the Federal Reserve hiked interest rates to as high as 4.5% to curb an inflation surge in the United States. This created a terrible situation at SVB’s end as the value of the treasury bonds declined. The fall in bond prices itself would not have been a major problem until these held to maturity securities were actually sold and losses were realized.
Sadly for the bank, interest rates also raised borrowing costs throughout the economy and Silicon Valley Bank clients started pulling money out to meet their liquidity needs. To raise cash to pay withdrawals by its depositors, SVB had to sell off its securities at a devastating loss of $1.8 billion. Following which, it announced on March 8 that it had sold over US$21 billion worth of securities, borrowed $15 billion, and would hold an emergency sale of some of its treasury stock to raise $2.25 billion. The announcement, coupled with warnings from prominent Silicon Valley investors, caused a bank run as customers lost faith: a major building block of any financial institution; and started to withdraw funds totalling $42 billion by the following day and the shares of the tech-focused bank plunged by 60% bringing down SVB’s market cap even below $7 billion!
As of the last call report of the bank, filed on December 31, 2022, it held $209 billion in total assets, with $175.5 billion in total deposits, of which the bank estimated $151.6 billion (86.4 percent) were uninsured, causing huge distress among the depositors.
SVB’s collapse had an immediate impact on the startup world, with many young companies struggling to secure funding and access to capital. The failure reflects the growing financial insecurity in the tech sector, which has seen rapid growth and expansion over the last decade. This has resulted in a proliferation of startups and other ventures taking on large amounts of debt and risk to fuel growth. Many high-risk businesses across the world have been left without funding by the collapse.
The collapse could have a major impact on India's economy. SVB has invested in around 21 Indian startups including Paytm, Bluestone, Naaptol and Games2win Media amongst others. The Indian Software-as-a-Service (SaaS) companies with US-based operations are withdrawing funds and transferring them to other global banks on the advice of venture capital investors.
The crisis has posed huge risks worldwide. The risk of default and loss of deposits here is that the next less capitalized bank will run amok and fail, and the dominoes will continue to fall. This could clearly be seen in case of the New York-based Signature Bank which collapsed on March 12, 2023 following SVB’s collapse, thereby marking the third largest failure in the U.S. banking history.
However, the U.S. government argues that safeguards enacted after the 2008 financial crisis will protect the country's economy amid Silicon Valley's bank shutdown. As of now, the bank has been placed under the receivership of the Federal Deposit Insurance Corporation (FDIC) and the regulators have been guaranteeing that the New York bank’s depositors will be made whole.
But the question that continues to haunt people is that whether this crisis could be the trigger that leads to a global financial crisis similar to the 2008 one. The argument goes that if a large and impactful financial institution like SVB experiences significant losses, this could lead to a domino effect across the financial system, causing a widespread collapse of the economy. Though as of now, it’s not clear as to whether this could lead to GFC 2.0 but it definitely happens to be one amongst the greatest fears in the minds of financial analysts worldwide.
Authors : Souptiki Nandi, Bhuvan Wadhwa
Illustration : Chetaniya Tamta
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