Silicon Valley Bank: How does the largest bank failure since the 2008 crisis impact startups
3 min read 12 Mar 2023, 07:42 PM ISTOn Sunday, US Treasury Secretary Janet Yellen said the federal government will not bail out SVB. However, the government is working to help depositors whose money is in the bank.
PremiumSilicon Valley Bank (SVB) is the talk of the town right now. The largest bank in terms of deposits to many startups in tech sector, has been shut down due to its cash crunch. Startups across the globe who have parked their money with SVB are struggling to withdraw their deposits. Billions of dollars of companies' deposits are trapped in SVB. Although, FDIC has announced measures to transfer the insured deposits back to individuals and companies, however, uncertainty looms around uninsured deposits. Early-stage companies are specifically impacted by the collapse of SVB.
Explaining the reason behind the collapse of Silicon Valley Bank, Suman Bannerjee, CIO of Hedonova, a US-based Hedge Fund, said, "I think Silicon Valley Bank fell victim to circumstances. They were a strong institution, and I worked with them on many occasions where they provided credit to our portfolio companies. Post-COVID, venture capital, and private equity funding grew significantly. Companies raised very large rounds of funding, and all this money was deposited with SVB. I don't blame the startups either. SVB is an iconic institution in the Bay Area with very deep relationships with venture capitalists."
Bannerjee added, "In 2020 and 2021, the bank's deposit base rose by $90 billion. But a bank has to make money by lending. SVB's customer base is concentrated among California tech startups who are already flush with cash and do not need loans."
Because of this, Bannerjee said, "SVB invested some $88 billion in mortgage-backed bonds in 2021. As the Fed increased interest rates, the value of these bonds collapsed, eroding SVB's capital base completely."
How does not removing money from SVB impact Indian startups?
Gaurav VK Singhvi, Co-Founder at We Founder Circle said, "SVB has been a preferred bank for a lot of Indian SaaS and Y Combinator-backed startups operating with Silicon Valley Bank largely because of its flexibility and maintaining ease in fundraising operations."
According to Singhvi, the news comes as a big shock and the shockwaves could have a limited impact on Indian startups directly and indirectly. Although many of the startups have already migrated their bank accounts to a different bank.
However, he added, "it is still being advised to not withdraw deposits from the bank which makes sense as banks operate on limited reserves, but we have to understand that these startups operate on a very limited runway and the effects could be detrimental for them if they do not withdraw their funds on time."
Singhvi hopes that the Federal Reserve proactively address and solve this, as it could shake investors' confidence for the short term in the US and global markets.
At present, Federal Deposit Insurance Corporation (FDIC) which is appointed as the receiver for SVB has created a Deposit Insurance National Bank of Santa Clara (DINB) which is expected to protect both insured and uninsured depositors of SVB. The bank will reopen on Monday which will be maintained by DINB and deposits will be released to the companies accordingly.
In a statement, FDIC said, all insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. While they will pay uninsured depositors an advance dividend within the next week. Also, it said, as he FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
As per FDIC data, as of December 31, 2022, SVB's total assets stood at $209.0 billion --- while its total deposits were approximately around $175.4 billion. About 89% of the bank's total deposits are uninsured.
On Sunday, US Treasury Secretary Janet Yellen said the federal government will not bail out SVB. However, the government is working to help depositors whose money is in the bank.
FDIC has announced to insure deposits up to $250,000 at SVB. But many companies who have deposited at SVB that have more than that amount.
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