Silicon Valley Bank Crisis - The Biggest Financial Meltdown since 2008
Silicon Valley Bank, a financial institution catering to the tech industry and venture capital firms, was once a major player in these industries, known for its expertise and close relationships with some of the biggest names in tech. However, recent events have caused the bank to face significant financial challenges, leading to its closure and a loss of billions of dollars. Read a detailed report by Metvy on Silicon Valley Bank(SVB) Crisis
The rise of the banking giant and its love for the Tech Industry
Silicon Valley Bank was founded in 1983, with a focus on serving the tech industry and venture capital firms. Over the years, it grew to become one of the largest banks in Silicon Valley, with assets of over $200 billion as of 2022. The bank was known for its close relationships with some of the biggest names in tech, such as Apple, Google, and Facebook.
Silicon Valley Bank mainly focuses on serving technology companies that have received funding from venture capitalists. The global venture funding reached $681 billion in 2021, resulting in a sudden surge of significant cash deposits in the bank. Consequently, the bank experienced a substantial increase in its total deposits, from $61.76 billion in 2019 to $189.20 billion by the end of 2021.
The SHOW begins!
While researching the matter on SVB Crisis, Metvy has found out, Over the past few months, Silicon Valley Bank has encountered significant hurdles as some of its high-profile clients have gone bankrupt, resulting in billions of dollars being stranded. One example is Greensill Capital, a major client of the bank that went bankrupt in 2022, causing the bank to suffer losses of over $3 billion. Another client, Archegos Capital Management, also collapsed, resulting in additional losses.
The reasons for these losses are attributed to several factors, including risky lending practices, inadequate risk management, and a lack of oversight. The bank reportedly invested heavily in risky assets, such as collateralized loan obligations (CLOs), which are complex financial instruments. When these assets started to decline in value, the bank experienced significant losses.
Despite the bank's growth in deposits, it was unable to expand its loan book quickly enough to achieve the desired yield on its capital. As a solution, the bank invested more than $80 billion in mortgage-backed securities (MBS) for its hold-to-maturity (HTM) portfolio. However, the funding winter of 2022 caused a decline in fund inflow, disrupting the balance of fund flows.
As of December 31, 2022, Silicon Valley Bank held approximately $209.0 billion in total assets and $175.4 billion in total deposits. The number of deposits that exceed insurance limits is currently unknown, and the FDIC will determine the amount of uninsured deposits after gathering additional information from the bank and its customers.
The Panic Attacks and Loss of Faith
Investors and customers of Silicon Valley Bank have been expressing concerns about the bank's ability to weather the storm, and some have criticized the bank's management for failing to take adequate steps to address the risks it faced. The bank has reportedly been working to shore up its finances by selling off assets and cutting costs, but it remains to be seen whether these measures will be enough to stabilize the bank's position.
Due to the Federal Reserve's efforts to fight inflation by raising interest rates from record-low levels, investors have become more risk-averse. This has had a negative impact on technology startups, which are the primary clients of Silicon Valley Bank, as their investors are less willing to take risks in a more expensive market. As a result, some Silicon Valley Bank clients faced a cash crunch, causing them to withdraw money to meet their liquidity needs. In order to fund these redemptions, Silicon Valley Bank sold a $21 billion bond portfolio at a loss, which forced them to recognize a $1.8 billion loss and raise capital through a stock sale. However, the stock sale collapsed after some clients pulled their money from the bank on the advice of venture capital firms, leading to SVB's receivership under the Federal Deposit Insurance Corporation. The FDIC announced that they will seek to sell SVB's assets and that future dividend payments may be made to uninsured depositors.
The American Intervention
American regulators have taken action to protect insured deposits in response to the bank's troubles. The Federal Deposit Insurance Corporation (FDIC) has taken over the bank, with all branches and operations being closed. The FDIC will work to ensure that the bank's assets are sold off in an orderly manner, with any proceeds being used to pay off the bank's liabilities and debts.
Despite the efforts to protect depositors and customers, the closure of Silicon Valley Bank is a significant event, with investors and industry insiders expressing concerns about the impact on the tech industry and venture capital firms. Some worry that the bank's collapse could lead to a broader economic downturn, with ripple effects felt across the industry.
In a stunning turn of events, Silicon Valley Bank has reportedly filed for bankruptcy, with losses estimated at $80 billion. This news has sent shockwaves across the financial world, with many wondering how such a prominent and well-regarded institution could fall so far. As Jordan Belfort said in "Wolf of Wall Street," "The only thing standing between you and your goal is the bullshit story you keep telling yourself as to why you can't achieve it." It seems that Silicon Valley Bank's story has come to a tragic end, and the industry will be grappling with the fallout for years to come.
What's in it for Indian startups?
Abhishek Patil (Founder, GrowthX) wrote a LinkedIn post suggesting things you should do If you are "Indian founder with funds in Silicon Valley Bank"
The California Department of Financial Protection and Innovation shut down the Silicon Valley Bank after a possible takeover came into the news and startups started withdrawing the money and transferring it to other banks
For Indian startups registering in the US, one of the USPs which SVB used to bring to the table was to allow them to register without a social security number - A Social Security number (SSN) is a unique identifier issued by the Social Security Administration. You need an SSN to work, and it’s used to determine your eligibility for Social Security benefits and certain government services. In case of acquisition by another bank, it’s not necessary that the bank might onboard businesses/customers without social security numbers, this would give jolt to Indian founders
Following the news going viral on WhatsApp groups and other social media platforms, several Indian neobanks have stepped up to assist Indian startups in opening accounts with US banks or transferring their funds to Indian accounts.
For example, TrulyFinancial has opened hundreds of accounts for Indian startups within the last eight hours, while RazorPay has established a dedicated desk to help fellow startups quickly move their funds from US banks to India.
It's your turn
If you found Metvy research report on the financial crisis of Silicon Valley Bank to be informative, you may be curious about how we were able to decode the complex financial information and present it in a detailed report. To shed light on this, it's worth learning about Metvy Finance and Research Program. By clicking on the provided link, you can increase your financial understanding and gain the tools necessary to write a comprehensive research report. Additionally, our counselors are available to help you get started with your holistic development.