SVB's Downfall: What It Means for the Technology Industry
Silicon Valley Bank, Credit Suisse–what next? As the industry reals from the banking sector's fallout, what does it mean for tech?
In just one week in March 2023, three banks in the USA filed for bankruptcy: Silicon Valley Bank, Signature Bank and Silver Gate Bank. Despite the different nature of the three banks' work, the collapse ignited one spark—and our tinder-box industry is crackling with anticipation.
Silicon Valley Bank's collapse is set to have a significant impact on the global banking and wider technology sector, according to The Washington Post. The majority of the bank's clients are electronics and information technology firms—Roblox holds 5 percent of its cash balance and securities worth $3 billion in the bank. This collapse is one of the most significant banking failures in the United States since the financial crisis of 2008. Meanwhile, the US authorities are currently trying to expedite strong measures to restore confidence in the banking sector. What are the details of this crisis and how did it begin?
Who was Silicon Valley Bank?
Silicon Valley Bank (SVB) was the world's largest lender to early-stage technology companies. It specialised in lending to early-stage businesses and supported nearly half of US-backed technology and healthcare companies that went public last year, in 2022. The bank, which was founded in California in 1983, expanded rapidly over the past decade and employed over 8,500 people worldwide, with most of its operations in the United States.
Reasons for the collapse
In recent years, the US Federal Reserve pumped massive liquidity into the markets and SVB was one of the beneficiaries. During the COVID-19 pandemic, emerging companies raised huge amounts of money from venture capitalists or through public offerings and deposited a large portion of their funds in SVB Bank, which increased the bank's deposit portfolio from $60 billion in 2019 to approximately $200 billion in 2022.
During this period, with the growth of the deposit portfolio, the bank used about $85 billion to purchase long-term bonds, forming a huge portfolio with an average yield of around 1.7 percent. Since the yields on deposits were nearly zero, this gave the bank a good advantage to benefit.
This situation changed completely when the Federal Reserve rapidly raised interest rates at the beginning of 2022, eroding the value of the long-term bonds owned by the bank due to the inverse relationship between bond prices and interest rates. In addition to emerging companies withdrawing some of their liquidity due to the difficult economic situation and the slowdown in technology stocks, the Fed’s decision led to a liquidity crisis. To avoid the crisis, the bank sold some bonds—at a loss of $1.8 billion—and made a desperate attempt to raise capital, which spread in the market and led to panic among investors and customers, followed by further withdrawals.
Over $42 billion in deposits were withdrawn in one day on 9th of March, a quarter of the bank's entire deposits. It was the largest withdrawal operation since the global financial crisis. No matter how big a bank is, it will not be able to withstand a quarter of its deposits being withdrawn in one day.
Where is the regulation?
In the era of former US President Donald Trump, the DODD FRANK laws were changed, which exempted banks with assets of less than $250 billion from strict regulatory rules and laws such as required liquidity levels, financial viability and stress tests that were introduced to the banking sector after the 2008 global financial crisis.
Without these exemptions, the authorities would have been able to detect the crisis before it collapsed. It is worth noting that the interest rate hike carried out by the Federal Reserve cost US banks $620 billion in unrealised losses, and if realised, it may not affect large banks; but it would be catastrophic for small banks.
Did remote work contribute to the collapse?
Experts think it may have been one of the risks listed by the bank before its collapse. However, blaming remote work as the sole cause ignores deeper organisational issues. As CNBC reported, some experts believe it is an excuse that fails to address the root cause of the problem, which was the lack of effective leadership, communication and management practices.
Following the closure and judicial supervision of SVB in California by the Federal Deposit Insurance Corporation, a series of decisions were made by the Treasury Department, Federal Reserve and the Federal Deposit Insurance Corporation to protect consumers and the banking system. These decisions included ensuring that all depositors could access their money, using lending powers to provide more funds for bank withdrawal requests, providing additional funding to qualified deposit institutions and providing $25 billion in credit protection for Federal Reserve banks using the Exchange Stability Fund.
Shareholders who signed and some holders of unsecured debt will not be protected, and the financing operation interest rate will be the general interest rate for one year, plus 10 basis points, with the collateral assessed at nominal value—and a margin of 100 percent of the nominal value. Financing requests can be made until March 11, 2024, and prepayments will be made with reference to the qualified borrower's pledged collateral. US President Joe Biden also pledged to hold those responsible accountable and to continue efforts to strengthen oversight and regulation of large banks to prevent this situation from happening again, with no taxpayers' money exposed to risk.
Despite the panic in Wall Street, it is unlikely that a real crisis will hit the US banking sector in a scenario similar to the 2008 crisis, which experts currently consider unlikely at present. They justify this by the good liquidity and capital adequacy present. However, it is unknown what the impact will be on sectors such as technology and crypto, which have exposure to banks like "Silicon Valley" and "Signature" for many reasons, including the natural decline in funding for these activities due to the current economic conditions and the fact that the measures protect depositors and not companies. Furthermore, in another twist in the tale, Swiss banking giant UBS agreed to buy rival Credit Suisse for roughly $3 billion, in a deal brokered by the Swiss Government, in an effort to protect the Swiss and wider European financial sectors from wider jitters in the market. Although there is no direct link between SVB and Credit Suisse regarding their situations, bear market conditions, coupled with real-time access to information and panic across social media, means one bank's fall can precipitate another, thousands of miles away.
Technology sector impact
SVB's collapse will have a significant impact on the technology industry, particularly those in the information sector, due to the credit it provided. Unfortunately, similar alternative options may not be available for these companies, as other banks lack the courage to replace Silicon Valley Bank and support startups' high risks and consequences. Almost half of the technology and life science companies financed by US investors are among its clients, making it the "founder's bank."
The question on everyone's lips? Who will emerge as the founder's bank now?
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