In recent events, American commercial lender SVB Financial Group reportedly collapsed late last week, sending shockwaves throughout the globe. Authorities put the curtains down on the US-based lender after a freefall in its stock snowballed into a gargantuan market loss of over 80 million dollars.
The failure of the Silicon Valley Bank (SVB) marks the collapse of a major bank since the 2008 financial crisis and the sudden slump has stranded billions of dollars belonging to investors, companies, and depositors.
The SVB debacle unraveled in just 48 hours on the heels of the bank’s announcement of its intentions to raise funds exceeding 2 billion dollars to paper the cracks in its balance sheet. As panic spread among its depositors and investors, SVB was compelled to abandon its fundraising endeavour, but the damage was already done.
Causes of Silicon Valley Bank Collapse
Many analysts have stated that the bank caved in due to sustained high interest rates even though the downfall happened in 48 hours. To tackle inflation, central banks around the globe, headed by the Federal Reserve, raised key rates aggressively, negatively impacting several start-ups and tech businesses while pouring cold water on investor sentiments. This fostered a risk-averse approach among investors.
As high interest rates choked investments for tech start-ups, SVB’s customers scampered to withdraw money to meet their liquidity needs. The events that followed heralded Silicon Valley Bank’s demise. SVB liquidated a 21-billion-dollar portfolio, primarily made up of US Treasuries, at a staggering loss of 1.8 billion dollars to meet withdrawal demands. The portfolio’s average yield as of March 10 was 1.79 percent, which is significantly lower than the current 10-year Treasury Yield of around 3.75 percent.
The bank declared it would sell 2.25 billion dollars in ordinary equity and preferred convertible stock to close the $1.8 billion financial gap. This unexpected news on Thursday raised questions about its balance sheet, and its shares fell by 60%.
Investors’ worries were heightened, and panic increased because of SVB’s fundraising announcement occurring immediately after the closure of Silvergate Capital, a bank focused on cryptocurrencies.
Following advice from venture capital firms, investors immediately withdrew their funds from the bank. This alarmed the bank’s other significant investors and caused the proposal to sell stocks to be abandoned.
On Friday, SVB made frantic attempts to identify alternative financial sources and even entertained the idea of selling the business. Yet despite last-ditch efforts, it was ultimately forced to shut down by the authorities, after which it was turned over to the FDIC.
Future dividend payments to uninsured depositors may be made, the FDIC noted, adding that it will try to sell SVB’s assets.
Impact on India
As the world gears up for the domino effects of SVB’s downfall, the Indian banking system is unlikely to witness any major impact, according to experts. However, it will have some impact on investor sentiments.
“The collapse of SVB will not have any effect on the Indian banks as the Indian banking system is more insulated and regulated under the supervision of RBI,” said Kranthi Bathini, Equity Strategist at WealthMills Securities.
On Sunday, Minister of State for Electronics and IT Rajeev Chandrasekhar took to Twitter to state that he will meet start-ups this week to get a first-hand knowledge of the impact of their exposure to Silicon Valley Bank crisis.
“The SVB_Financial closure is certainly disrupting startups across the world. Startups are an imp part of NewIndia Economy. I will meet wth Indian Startups this week to understand impact on thm n how @narendramodi govt can help during this crisis,” tweeted Rajeev Chandrasekhar, Minister of State for Electronics and IT.
Also Read – UBS to acquire Credit Suisse; 5 biggest bank acquisitions and mergers in recent history