In what is perhaps one of the biggest global financial crises since the dark times of 2008, the SVB or the Silicon Valley Bank Financial Group based in Santa Clara, California became the largest bank to fall on March 10, 2023. The impact of the SVB collapse was felt globally, as the startup-focused lender was the 16th biggest in the US as of the end of 2022, with around $209 billions worth of assets.
As California banking regulators closed SVB once and for all, the Federal Deposit Insurance Corporation (FDIC) was appointed to be the receiver for later disposition of the assets.
The shock of the SVB collapse had barely died down when state regulators also closed the NY-based Signature Bank on Sunday, March 12, which became the third-biggest bank failure in the history of the US. While the US Treasury Department and other regulators assured that all depositors in both banks will be made whole, there’s no doubt a global financial crisis brewing following the negative sentiments among investors across countries.
What can we learn from the SVB collapse? That’s what we find out in this post.
Why did the collapse of the SVB come about?
In brief, the SVB collapse was brought about by mistakes made by the SVB Treasury team in predicting the Economic situation arising out of increase in Fed interest rates. Here’s a quick look at the events that preceded the SVB downfall:
The Silicon Valley Bank saw a huge number of deposits from startups and venture capital firms in the post-Covid period, and the funds were deposited in long-term securities offered by the US government.
While these investments would usually have been considered safe, their value fell as the Federal Reserve turned towards implementing aggressive monetary policies to bring down high inflation.
SVB’s depositor base mainly consisted of startups and tech companies, who started largely withdrawing their deposits owing to the dried up venture capital funding through public offerings.
The big-scale withdrawals left SVB with no choice but to sell off their holdings in bonds, which led to the bank bearing mark-to-market losses while the existing bond values dropped in tandem with the increase in yields.
The SVB CEO informed shareholders of a loss of $1.8 billion they had suffered on the sale of US treasury bonds on sale of $21 billion assets, and chalked out a plan to raise capital through a sale of shares. The plan to raise capital and sell off assets to meet deposit demands of customers was not well received by investors and depositors.
However, this set the stage for a classic bank run as venture capital firms pulled their funds, and the situation deteriorated as the VC firm asked their portfolio companies to move money away from their bank account in SVB. Now, as these were corporate deposits, they went past the deposit insurance limit at $250,000.
The bank run went to be worth about $42 billion, which turned out to be about a quarter of the SVB’s total deposits. The bank could not honour its obligations as per its plan, and it was finally out of cash completely.
Regulatory interventions took place right after, as the Treasury Secretary, the banking regulator, and the resolution authority collaborated to take prompt action. The Silicon Valley Bank was closed by the California banking regulators and the FDIC was appointed to be the receiver of the bank’s assets.
The entire process, of course, reminds you of several instances from the global financial crisis of 2007-2008, such as the Northern Rock bank run.
What can we learn from the SVB collapse?
The SVB collapse signifies a failure of the financial policy implemented in the US after the financial crisis of 2008. A long period of low interest rates followed by aggressively rising rates are reason enough to send banks with high exposure to bonds into deep risk. Here’s what we can learn from the SVB collapse:
Risk Management
Organisations must learn to pinpoint the key risk factors in their investment strategies, and more careful risk assessment is necessary.
Treasury Management and Diversity in Portfolio
High concentration in one single segment of assets or the market, or even one business partner can increase risks, which is exactly why companies with over concentration in the SVB bore higher losses. Risk management strategies should involve better diversification of investments.
Having a treasury management policy and reviewing it on a regular basis is important to ensure an organisation’s financial stability. A well-fabricated treasury management policy can help optimise cash resources, minimise risks, and improve overall performance for an institution.
Even The Biggest Banks Are Prone To Risk
And finally, the SVB collapse shows us that even the biggest of traditional financial institutions can fall prey to the most obvious of risks.
Further, speaking of global implications,
The SVB collapse speaks of the need for regulatory tools that can provide a buffer for losses caused by rising interest rates. One such instrument in Indian banking regulations is the IFR or the Investment Fluctuation Reserve. The IFR is created through the transfer of gains from sales of investments during a low interest rates cycle. So when interest rates are hiked again, these gains can provide some safeguard.
Here's a few things you can learn about the deposit insurance by RBI in Indian banks.
Conclusion:
We do hope this post shed some light on the events surrounding the SVB collapse for you, along with what we can learn from it. As a startup or small business in India, you can also use neobanks like Salt for the ease of doing global business, that too with local accounts. Want to find out how? Give our website a visit today!
