What really happened to the Silicon Valley Bank?
Let’s say you have 10 Lakh rupees in your bank account. How comfortable are you that your money is totally safe with the bank? If your bank is an Indian one, it might be reasonably safe. But it is still not 100% safe. Let me explain why it is so.
Recently, the Federal Deposit Insurance Corporation in the USA seized the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.
Silicon Valley bank was not a small bank — it was the 16th largest bank in the USA, holding USD 210 billion worth in assets — which is now under the control of FDIC.
Let’s see what happened to such a large bank.
There is something called a bank run where there is a sudden withdrawal of deposits by customers of just one bank. A banking panic is a financial crisis that occurs when many banks suffer runs at the same time, as a cascading failure.
What happened to the Silicon Valley Bank in the USA is a classic case of a Bank Run.
SVB’s position as the go-to bank in tech made it a huge beneficiary of the Silicon Valley boom in the last few years. As venture capitalists raised huge funds and then invested that money into start-ups that bank with SVB, billions of dollars flowed into SVB as deposits.
Usually, a bank turns its deposits into loans to its customers. But because of the tech boom, there wasn’t a lot of demand for loans among SVB’s tech customers. So, SVB decided to park that cash in securities.
There are two types of securities:
- Securities held for the long term, called “held-to-maturity” (HTM) assets, or
- Security made available to sell at any moment, called “available for sale” (AFS) assets
Generally, you go for an HTM asset because the value of those assets does not move up and down with interest rates or the overall market. AFS assets, in contrast, are much more volatile, as their value on the balance sheet goes up and down with the market.
The bulk of SVB’s HTM assets were in Treasuries and mortgage bonds. To combat inflation in the USA, US Federal Reserve increased the interest rates. As rates went up, the value of SVB’s assets plunged. But as long as the assets were held to maturity, the paper losses did not register on SVB’s balance sheet.
The tech boom soon faded and SVB’s start-up customers started to ask for some of their deposits back. Eventually, SVB reached a point where it had to sell some of the securities it had invested in, to have enough cash to return that money to depositors.
Since SVB could not sell its HTM assets, it sold USD 21 billion in bonds from its AFS portfolio, taking a 1.8 billion USD loss. To compensate for this loss, SVB sought to raise money from investors. But that capital call failed, leaving a huge hole in SVB’s balance sheet.
The key for any bank is to manage their liquidity, so they have enough cash to meet their short-term commitments should lots of their depositors suddenly want their money back. It was an old-fashioned “bank run” that sent SVB spinning.
SVB was closed by regulators a few days ago and put under the control of the Federal Deposit Insurance Corporation. In the USA, through FDIC, even if your bank goes bankrupt, you can claim up to 250,000 USD. It is still unclear how many SVB accounts exceed this insurance limit.
This has caused shock waves across the banking industry. Shares of major banks have been down anywhere from 5–15 percent.
There are startups in India with investments and debt deals through SVB. These startups will have some impact as their cash flows will be restrained now and could come under pressure to control and cut costs. This could even lead to layoffs.
The HR and staffing firms though are saying that they are confident in the Indian economy and predict the SVB crisis will have minimal impact on the Indian talent market.
So, although there is not an immediate major impact expected for India due to the collapse of the Silicon Valley Bank, this is a wake-up call to all the banks to check if their asset management is proper or not.
