Modern Collapse of International Banking System: Silicon Valley Bank
‘The management of the Bank will be fired, there would be no protection given to investors in Silicon Valley bank’, these were the first word of US President Mr Joe Biden with regard to the Silicon Valley bank collapse. Why are new-era banking companies getting failed? Is it the start of a similar era of the 2008 financial crisis – the domino effect? What would be the impact of this on the Indian Banking system? These are the questions arising in the mind of millions of people, this article will let you deep dive into the topic and address the questions.
Silicon Valley Bank (SVB) was a government-regularized commercial bank headquartered in Santa Clara, California. Its major business areas were California and Massachusetts. The Silicon Valley bank was a primary subsidy of SVB Financial Group, a publicly listed bank holding company that had offices in 15 different U.S. states and over a dozen international jurisdictions. SVB specialized in providing financial services to technology companies, venture capital firms, and other businesses in the innovation economy. The bank offered a wide range of products and services, including commercial banking, investment banking, and private banking.
In March 2023, SVB Financial Group filed for Chapter 11 bankruptcy. The bankruptcy did not include its main subsidies like SVB Capital or SVB Securities. Silicon Valley Bridge Bank or SVB Private is also not part of the bankruptcy filing as they got detached from SVB Financial Group. The fallout has created what startups and individual investors commonly refer to as a large gap in the ecosystem of which the full-on-scale impact on technological companies and startups is yet to be determined.
There are a number of reasons why new-era banking companies are getting failed. The most common reasons are:
Over-expansion: New-era banking companies often expand too quickly, taking on too much risk in the process. This can lead to problems when the economy turns down or when there is a downturn in the industry that the bank specializes in.
Lack of experience: New-era banking companies often lack the experience and expertise of traditional banks. This can lead to mistakes in lending and other financial decisions.
Poor risk management: New-era banking companies often have poor risk management systems in place. This can make them more vulnerable to financial losses.
Silicon Valley Bank (SVB) is an example of a new-era banking company that failed. SVB was a leading provider of financial services to technology companies. However, the bank has over-expanded in recent years, taking on too much risk. This led to financial problems when the economy turned down in 2023. SVB was unable to raise the additional capital it needed to stay afloat, and it was shut down by regulators.
The failure of SVB is a warning to other new-era banking companies. These companies need to be careful not to over-expand and to have strong risk management systems in place. Otherwise, they may face the same fate as SVB.
In addition to the reasons mentioned above, there are a few other factors that may have contributed to the failure of SVB. These include:
The rise of FinTech: The rise of FinTech companies has made it more difficult for traditional banks to compete. FinTech companies offer a variety of financial services that are often more convenient and affordable than those offered by traditional banks. This has led to a decline in the profits of traditional banks, making them more vulnerable to financial losses.
The regulatory environment: The regulatory environment for banks has become more complex in recent years. This has made it more difficult for banks to comply with regulations, which has added to their costs.
The global economic slowdown: The global economic slowdown has led to a decline in demand for loans and other financial services. This has made it more difficult for banks to generate revenue, which has made them more vulnerable to financial losses.
Company’s Financials before the crash:
Assets: As of December 31, 2022, SVB had assets of $209 billion. This was a decrease of $2.4 billion from the previous year. The decrease in assets was due to a number of factors, including the sale of $1.6 billion in loans and the decline in the value of securities.
Liabilities: As of December 31, 2022, SVB had liabilities of \$199 billion. This was an increase of $1.8 billion from the previous year. The increase in liabilities was due to the increase in deposits and the issuance of $1.5 billion in debt.
Capital: As of December 31, 2022, SVB had a capital of $10 billion. This was a decrease of $1.8 billion from the previous year. The decrease in capital was due to the decline in the value of securities and the issuance of $1.5 billion in debt.
Profitability: SVB’s net income for the year ended December 31, 2022, was $1.2 billion. This was a decrease of $1.6 billion from the previous year. The decrease in net income was due to the decline in the value of securities and the increase in expenses.
Risk: SVB’s risk-based capital ratio was 13.04% as of December 31, 2022. This was below the regulatory requirement of 10.0%. The low risk-based capital ratio was a concern for regulators, as it indicated that SVB was not well-capitalized to withstand a financial downturn.
Company’s Financials during the Crash:
Assets: As of March 8, 2023, SVB had assets of $202 billion. This was a decrease of $7 billion from the previous day. The decrease in assets was due to a combination of factors, including the sale of $3 billion in loans and the decline in the value of securities.
Liabilities: As of March 8, 2023, SVB had liabilities of $195 billion. This was an increase of $5 billion from the previous day. The increase in liabilities was due to the increase in withdrawals and the issuance of $2 billion in debt.
Capital: As of March 8, 2023, SVB had a capital of $7 billion. This was a decrease of $10 billion from the previous day. The decrease in capital was due to the decline in the value of securities and the increase in withdrawals.
Profitability: SVB’s net income for the day was -$2 billion. This was a significant loss, and it was the first time that SVB had ever reported a loss in a day. The loss was due to a combination of factors, including the decline in the value of securities and the increase in expenses.
Risk: As of March 8, 2023, SVB’s risk-based capital ratio was 8.0%. This was below the regulatory requirement of 10.0%. The low risk-based capital ratio was a major concern for regulators, as it indicated that SVB was not well-capitalized to withstand a financial downturn.
The Domino Effect of Silicon Valley Bank Collapse
The collapse of Silicon Valley Bank (SVB) in March 2023 had a number of domino effects on the global economy.
The collapse of SVB led to a loss of confidence in the banking system. This led to a run on other banks, as depositors withdrew their money in fear that their banks might also fail. This, in turn, led to a decline in the value of banks’ assets, as they were forced to sell them at a discount to raise cash.
The collapse of SVB also led to a decline in the stock market. Investors were worried about the impact of the collapse on the broader economy, and they sold off shares in banks and other financial institutions. This led to a decline in the value of these stocks, which further eroded investor confidence.
The collapse of SVB also led to a decline in lending. Banks were less willing to lend money, as they were worried about the risk of default. This led to a decline in investment and economic activity.
The collapse of SVB also led to a decline in the value of tech stocks. SVB was a major lender to technology companies, and its collapse led to concerns about the financial health of these companies. This, in turn, led to a decline in the value of their stocks.
The collapse of SVB also led to job losses. As banks and other financial institutions cut back on lending, they also laid off employees. This led to a loss of jobs in the financial sector, as well as in other industries that rely on lending.
The collapse of SVB also led to a decline in economic growth. The decline in lending and investment led to a decline in economic activity. This, in turn, led to a decline in employment and wages.
The domino effect of the collapse of SVB is still being felt today. It is likely to have a lasting impact on the global economy, and it will take some time for the economy to recover. In addition to the domino effects mentioned above, the collapse of SVB also had a number of other negative consequences. For example, it:
Disrupted the supply chain for technology companies. SVB was a major provider of working capital loans to technology companies. When the bank collapsed, these companies were forced to find new sources of financing, which disrupted their supply chains.
Increased the cost of capital for technology companies. The collapse of SVB made it more difficult for technology companies to raise capital. This led to an increase in the cost of capital for these companies, which made it more difficult for them to grow.
Damaged the reputation of the technology industry. The collapse of SVB raised concerns about the financial health of the technology industry. This damage to reputation could make it more difficult for technology companies to raise capital and attract talent in the future.
1st Domino: Credit Suisse
Major Influencers of Domino Effect:
Disrupted Credit Suisse’s supply chain: SVB was a major provider of working capital loans to Credit Suisse. When the bank collapsed, Credit Suisse was forced to find new sources of financing, which disrupted its supply chain.
Increased the cost of capital for Credit Suisse: The collapse of SVB made it more difficult for Credit Suisse to raise capital. This led to an increase in the cost of capital for Credit Suisse, which made it more difficult for it to grow.
Damaged Credit Suisse’s reputation: The collapse of SVB raised concerns about the financial health of Credit Suisse. This damage to reputation could make it more difficult for Credit Suisse to raise capital and attract talent in the future.
The similarities between the two banks: Both SVB and Credit Suisse were major providers of financial services to technology companies. This made them both vulnerable to the same risks, such as the decline in the value of tech stocks.
The timing of the collapses: The collapse of SVB occurred just a few weeks before the collapse of Credit Suisse. This suggests that the collapse of SVB may have contributed to the collapse of Credit Suisse by further eroding investor confidence in the banking system.
The intervention of regulators: Regulators were forced to intervene in the collapse of SVB by taking over the bank. This intervention may have sent a signal to investors that other banks were also at risk, which could have contributed to the collapse of Credit Suisse.
Impact on India
Reduced access to capital for Indian startups: SVB was a major provider of financial services to Indian startups. Its collapse would make it more difficult for these startups to raise capital, which would slow down their growth.
Increased cost of capital for Indian startups: The collapse of SVB would also make it more expensive for Indian startups to raise capital. This is because investors would be more hesitant to invest in startups, as they would be worried about the risk of default.
Decreased investment in India: The collapse of SVB would also lead to a decrease in investment in India. This is because foreign investors would be less likely to invest in India, as they would be worried about the stability of the Indian financial system.
The damaged reputation of India’s startup ecosystem: The collapse of SVB would damage the reputation of India’s startup ecosystem. This could make it more difficult for Indian startups to attract talent and raise capital in the future.
Job losses: The collapse of SVB would lead to job losses in India. This is because SVB had a significant presence in India, and its collapse would force the bank to lay off employees.
Slower economic growth: The collapse of SVB would slow down economic growth in India. This is because the decline in investment and innovation would lead to a decrease in economic activity.
Exposure of Silicon Valley Bank in Indian Companies (in Million Dollars):
| Company | Total funding |
| Divitas Networks | 4 |
| Shaadi | 8 |
| CarWale | 9 |
| iCafe Manager | 10 |
| GeodesicTechniques | 11 |
| Sarva | 12 |
| Asklaila | 12 |
| Anantara Solutions | 13 |
| Games2win Media | 13 |
| Hitachi Payment Services | 18 |
| Loylty Rewardz | 28 |
| Genesis Colors | 74 |
| iYogi | 85 |
| TutorVista | 102 |
| BlueStone | 111 |
| Naaptol | 133 |
| Bharat Financial Inclusion | 144 |
| Paytm Mall | 808 |
| One97 Communications | 2787 |
| Paytm | 4637 |
Conclusion:
Silicon Valley Bank (SVB) was a major bank that specialized in providing financial services to technology companies. In March 2023, SVB was forced to shut down after a run on the bank. The collapse of SVB was a major event that had a significant impact on the technology industry. SVB was a major lender to technology companies, and its collapse made it more difficult for these companies to raise capital. This led to a decline in investment and innovation in the technology industry.
The collapse of SVB also had a ripple effect on the broader economy. The decline in investment and innovation in the technology industry led to a decline in economic growth. This, in turn, led to job losses and a decrease in consumer spending. The collapse of SVB is a reminder that even the most well-respected banks are not immune to financial losses. It is also a reminder that the collapse of a financial institution can have a significant impact on the economy.
Here are some of the lessons that can be learned from the collapse of SVB:
Banks need to be well-capitalized to withstand financial downturns SVB’s collapse was due in part to its low risk-based capital ratio. This means that the bank did not have enough capital to withstand a decline in its assets.
Banks need to have a diversified lending portfolio. SVB’s collapse was also due to its over-exposure to the technology industry. This means that the bank was too reliant on a single: Industry for its profits.
Banks need to be transparent with their financial information: SVB’s collapse was exacerbated by the fact that regulators did not have a clear understanding of the bank’s financial condition. This made it difficult for regulators to intervene before the bank collapsed.
The collapse of SVB is a tragedy that affected many people: The collapse of SVB is a reminder that even well-respected banks are not immune to financial losses. Every invest should assess their financial positions on a continuous basis.
Frequently Asked Questions:
The risk-based capital ratio (RBC) is a financial ratio that measures a bank’s financial strength. It is calculated by dividing the bank’s capital by its risk-weighted assets. The RBC ratio is used by regulators to assess the safety and soundness of banks.
To calculate the risk-based capital ratio, you need to know the following:
Capital: This is the amount of money that the bank has available to absorb losses. It includes the bank’s equity capital and its retained earnings.
Risk-weighted assets: These are the assets that are considered to be the most risky. They include loans to borrowers with poor credit ratings, investments in risky securities, and off-balance sheet items.
The RBC ratio is calculated by dividing the bank’s capital by its risk-weighted assets. The formula is as follows:
RBC = (Capital / Risk-weighted assets) * 100%
For example, if a bank has a capital of $10 billion and risk-weighted assets of \$100 billion, its RBC ratio would be 10%. The minimum RBC ratio required by regulators varies from country to country. In the United States, the minimum RBC ratio is 10%. This means that banks in the United States must have capital equal to at least 10% of their risk-weighted assets. A higher RBC ratio is considered to be better, as it means that the bank has more capital available to absorb losses. Banks with a low RBC ratio are considered to be more risky, as they have less capital available to absorb losses.
The RBC ratio is a valuable tool for regulators to assess the safety and soundness of banks. A low RBC ratio can be a sign that a bank is taking on too much risk, which could lead to financial problems in the future.
The timing of the report: The Hindenburg Report was released just a few weeks before the collapse of SVB. This may have given the bank too little time to take corrective action.
The complexity of SVB’s business: SVB is a complex company with a wide range of businesses. This made it difficult for Hindenburg to fully understand the risks associated with the bank.
The lack of cooperation from SVB: SVB did not cooperate with Hindenburg’s investigation. This made it difficult for Hindenburg to gather the information it needed to make a definitive case against the bank.
SVB was able to take steps to address the concerns raised by the Hindenburg Report. The bank hired a new CEO and a new CFO, and it initiated a number of reforms to its lending practices. These steps may have helped to restore investor confidence in the bank (for a short period of time).
The failure of Hindenburg to catch the collapse of SVB is a reminder that even the well-researched short reports can be wrong. It is also a reminder that the collapse of a financial institution can be caused by a number of factors, not just the fraudulent activities of its executives.