Silicon Valley Bank (SVB) Crisis | 10 Simple Points & Lessons

The sudden catastrophic collapse of the 16th largest bank in USA, the Silicon Valley Bank (SVB) and its seizure by the US Regulatory Authorities, in the last week, has caught the attention and interest of ‘We – the Mango People’ of India also, and has raised some nerves too.

But in view of the very limited and negligible exposure of our Indian Banking System and our Indian economy, to the economic and other repercussions of the fall out of this US based bank’s failure, this collapse hopefully, will not have any direct financial impact on us. Though a few of the Indian Tech-startups do have some exposure in SVB.

However, this SVB crisis does impart some critical learning lessons for us. But before delving into the same, it becomes essential to first know and understand what actually has happened, which has led to this massive banking failure in the US.

So, here is a simple Explainer in 10 easy to understand, chronological turn of events, decoding the otherwise complicated maze of financial and technical jargons.

1. It all started on a very promising and bright note, with majority of the US Silicon Valley’s big Tech-Startups, raising huge funds in a funding spree from venture capitalists and big investors and depositing their surplus/unutilised fund raises with SVB.
2. SVB instead of keeping these deposits in liquid form (cash) with it, invested these deposits in US Treasury Bonds. It is pertinent to mention here that these US Treasury Bonds were adequately backed by the US Government, with minimalistic default risk, so to be fair to SVB, these investments were not bad or risky.
3. The time bomb started ticking when the US Federal Reserve (the US Central Bank like RBI in India) increased Federal Interest Rate (US Central Bank lending rate like Repo Rate in India) in a series of interest rate hikes, in order to curb inflation in the US.
4. There is an inverse corelation between the interest rate and the bond prices. The increase in interest rate is being compensated by a decrease/compression in the principal value of the bond or debenture. So, the increase in the US Federal Interest Rate, resulted in the decline in the US Treasury Bond prices, which constituted the major chunk of the investment portfolio of SVB.
5. The Market Value/Net Realisable Value of these US Treasury Bonds, forming the investment portfolio of SVB, became less than the carrying value/ book value of these investments, in the Balance Sheet of SVB.
6. At the same time, Silicon Valley Start-ups started incurring cash losses and faced a funding freeze and stopped getting funds from investors.
7. This liquidity crunch forced these Startups to ask for their money/deposits back from SVB.
8. In order to honour such deposit withdrawal demands of the Silicon Valley Start-ups, SVB was forced to sell its investments in the US Treasury Bonds at a loss of around $1.8 billion, due to rising federal interest rate and declining bond prices. To compensate for this loss, SVB announced the capital raise of 2.25 billion USD along with its stock sale. This created panic among the Silicon Valley Startups, and further accelerated the process of withdrawal of their deposits from SVB.
9. Fresh Deposits also became more expensive for SVB, with Federal Interest Rate’s hike.
10. All this led to a crash of share price of SVB by more than 60% in the US capital market, and ultimately the collapse of SVB, and the Federal Deposit Insurance Corp. (US Regulatory Body) assuming the regulatory control of the Bank.

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