In recent news, the Silicon Valley Bank (SVP) Financial Group suffered a shutdown at the hands of U.S. banking regulators, sending ripples of concern through the startup sector. The downfall of the bank was principally due to the U.S. Federal Reserve’s decision to increase interest rates. This move reduced the willingness of investors to take on risk and prompted them to withdraw their funds to maintain liquidity.
Understanding the Decline of SVP Financial Group
A series of unfortunate events led to the failure of SVP Financial Group. These began with the Federal Reserve deciding to raise rates, which resulted in some SVB clients facing a cash crunch. In response, SVB decided to sell its bond portfolio at a loss, which led to the announcement of a stock sale. The stock sale, however, did not go as planned and eventually led to its collapse. This further pushed SVB into receivership.
Unveiling the Causes of SVB’s Failure
SVB experienced considerable losses upon selling all its available-for-sale securities—mostly consisting of US Treasury securities—at a whopping loss of USD 1.8 billion. The bank had seen an influx of deposits during the tech boom in 2020-2021, and it invested these in long-term Treasury bonds while the interest rates were low. However, the subsequent rise in interest rates caused the market value of these Treasuries to plummet significantly below what SVB had paid. This sparked a wave of withdrawal requests from depositors and further fuelled SVB’s financial woes.
The Ramifications of SVB’s Collapse
The fallout from SVB’s failure has raised several significant concerns about the stability of other banks.
Bank Runs
One such concern is the potential for bank runs. These can occur when customers, alarmed by the circumstances of a particular bank, panic and start withdrawing their deposits en masse. The immediate concern is that SVB’s failure might trigger a domino effect, scaring customers of other banks and leading to similar scenarios.
Impact on Indian Startups
SVB held considerable clout as a lender to several Indian startups, making its failure particularly distressing for the withdrawal of funds from their accounts. It provided an easy solution for startups in India to manage their finances; these firms could establish their bank accounts without the need for a United States Social Security Number or Income Tax Identification Number. Therefore, the failure of SVB poses a significant setback for these companies.