Silicon Valley Bank (SVB), the 16th largest bank in America, is now the most recent major bank to collapse since the 2008 Financial Crisis second only to Washington Mutual Inc.
Last Friday on 10th March, Federal Deposit Insurance Corp (FDIC) took over SVB, transferring all of their deposits to an entity they set up: Deposit Insurance National Bank of Santa Clara. This effectively means all deposits made by tech firms in Silicon Valley Bank have been frozen. This comes after Silicon Valley Bank revealed a USD1.8 Billion after-tax loss on investments on Wednesday evening, and is seeking to raise USD2.25 Billion in common and preferred stocks.
As the stock market opened, panicking depositors pulled out their money in anticipation of a bank failure, in fear of losing access to their deposits. Fortunately for the tech community, on 11th March Federal Authorities announced that all of Signature Bank and Silicon Valley Bank’s deposits would be available to customers on Monday morning. Usually, Deposits beyond the FDIC limit of $USD 250,000 will not be insured, meaning there is no guarantee of getting deposits back if the bank defaults and collapses.
The US Government has made an exception, as the banks’ collapse has been identified as a potentially serious consequence to the economy. SVB had more than USD 151 Billion worth of deposits over the FDIC Limit.
The unfortunate led-up
Established in 1983 by Wells Fargo executive Bill Biggerstaff and Stanford University professor Robert Medearis, they were both former Bank of America employees. Silicon Valley Bank was established to cater to the growing financial needs of the developing tech industry in Silicon Valley.
SVB for much of its reign services Silicon Valley’s tech startup industry, with an estimated 3,000 customers and firms affiliated with venture capital and private equity as of December 2022.
With the growth of the tech industry after the Post-Covid economic revival in 2021, its deposits soared, with its assets and value doubled. Too much easy cash that SVB dumped en masse into US Treasury and other government-sponsored debt securities before the Federal Reserve started raising interest rates in 2022.
Its total deposits grew by 86% in 2021 to $189 Billion, peaking at $198 billion in 2022’s first quarter.
Higher Interest Rates by the Federal Reserve prompted startup firms to drain their reserves quickly. Deposits fell by 13% during the final three quarters of 2022 and declined further in January and February of 2023.
Its bond portfolio slumped, as new bond issuances by the government with higher interest rates effectively meant little worth for relatively lower-valued bonds held by the bank.
Standard & Poor’s credit analysts explained their reason for downgrading SVB as they are heavily reliant and whose financial services are interconnected with the tech startup industry, which had laid off a significant portion of their workforce, seeing declining investments and venture capital opportunities.
The lack of investment in startups meant that insufficient deposits were made into SVB. Rising Interest Rates diminished SVB’s bond portfolio. It desperately needed capital. Investors and Hedge Fund Managers panicked and urged a bank run from its associates and clients, leading abruptly to its collapse.
Now the holding company behind Silicon Valley Bank, SVB Financial Group has filed for bankruptcy on 17th March ET.
As the 16th largest bank in the USA, they are in stern competition with other megabanks: Bank of America, JPMorgan, WellsFargo, and Citigroup.
With relatively Smaller resources and networks to conduct financial services, higher deposit rates are a major incentive to encourage the deposition of funds. Silicon Valley Bank’s rate was 2.33% in contrast with the industry average of 1.17%.
This proved attractive to Silicon Valley-based tech and life science startups looking to obtain a high cash flow and revenue amount to prepare for a slim chance of a sudden product takeoff, requiring them to immediately acquire funds in a short period of business days.
Its implicit connection to the tech industry has allowed its unprecedented growth by latching onto a symbiotic relationship with Silicon Valley firms.
Now, this has proven to be a double-edged sword. Investment has declined from higher interest rates, coupled with a slowdown after an initial recovery boom has subsided.
News coming of mass tech layoffs, the practice beginning from Elon Musk’s acquisition of Twitter and firing employees en mass allowed Microsoft, Google and other tech firms to layoff staff in January and February this year.
Mass layoffs are a sign that a firm is incurring a heavy financial burden and is unable to pay its debts. It appears that the Banking system has finally caught up as well.
A Domino Effect is on the horizon
The far-reaching consequences of SVB’s collapse might even cumulate in the bankruptcy of global companies from low liquidity at risk of defaulting. National Banks will have to bail them out to avoid a total economic collapse, further worsening debt burdens for the nation’s expenses.
That was the case back in the 2008 Financial Crisis, when then-President Bush signed a bill to purchase $700 billion worth of financial assets of failing firms at significant risk of defaulting by increasing market liquidity.
Previously President Biden signed a total of $4.6 Trillion Covid Relief Fund, already straining America’s debt burden.
If the worst-case scenario occurs and the US government has to bail the market out again, we can only imagine the devastating impact on inflation, investment, and consumption with a death loop.
With its downfall, the Silicon Valley Bank effect will string along other banks as well. Currently First Republic Bank is experiencing their own survival crisis. On 12th March 2023, Signature Bank, the 30th largest bank in the USA was closed and seized by the Federal authorities.
Credit Suisse, a Switzerland based banking firm was acquired by its local rival UBS to stabilise the Swiss economy and protect its financial services from any deposit loss and from declining investor confidence on 20th March 2023.
SVB effect on Malaysia
Our Budget 2023 aspired to strengthen Malaysia’s digital ecosystem, inherently Malaysia would be seeking investors to build a tech startup ecosystem.
However, the SVB phenomenon may halt this development since there would be a lack of funding for technological startups to thrive.
There may be further spillovers of SVB’s financial crisis, like the spillover of the 2008-2009 financial crisis affecting the international market.
Imported goods may be relatively higher than before, driving our inflated economy to more inflation. On the contrary, Malaysia has its economy mainly driven by domestic demand. This signifies that there are local alternatives that can sustain our country’s demand for goods and services.
A strategist at Morgan Stanley, Jonathan Garner, elaborates that Asia may experience lesser impact. It has been observed over the past year that Asia is experiencing re-growths with lesser concerns over asset quality. Malaysia may experience mild aftereffects from the SVB event, but our local inflation may persist due to uncertainty from our global supply chain.
We expect some initial downturns in the Malaysian economy from Silicon Valley’s ripples. For Malaysia to walk out of the crisis with minimal harm, our hopes are that our local market is strong enough to meet demand, investors making informed choices, and Budget 2023 delivers.
References
Benoit, D., Ensign, R.L. and Ostroff, C. (2023) “Signature Bank Is Shut by Regulators After SVB Collapse,” WSJ, 13 March. Available at: https://www.wsj.com/articles/signature-bank-is-shut-by-regulators-after-svb-failure-a5f9e0f7?mod=article_inline.
Business Today Editorial (2023) “SVB Shutdown Sends Shockwaves Through Silicon Valley As CEOs Race To Make Payroll – BusinessToday,” BusinessToday, 11 March. Available at: https://www.businesstoday.com.my/2023/03/11/u-s-hiring-surges-311000-jobs-filled-despite-fed-rate-hikes/.
Demos, T. (2023) Were SVB and Signature Bank Just Bailed Out by the U.S. Government? Available at: https://www.wsj.com/articles/were-banks-just-bailed-out-by-the-government-6b0a582f?mod=hp_theme_svb-ribbon.
Ensign, R.L., Driebusch, C. and Bobrowsky, M. (2023a) “Silicon Valley Bank Closed by Regulators, FDIC Takes Control,” WSJ, 10 March. Available at: https://www.wsj.com/articles/svb-financial-pulls-capital-raise-explores-alternatives-including-possible-sale-sources-say-11de7522.
Ensign, R.L., Driebusch, C. and Bobrowsky, M. (2023b) “Silicon Valley Bank Closed by Regulators, FDIC Takes Control,” WSJ, 10 March. Available at: https://www.wsj.com/articles/svb-financial-pulls-capital-raise-explores-alternatives-including-possible-sale-sources-say-11de7522.
Saeedy, A. (2023) “SVB Financial Files for Chapter 11 Bankruptcy Protection,” WSJ, 17 March. Available at: https://www.wsj.com/articles/silicon-valley-banks-failure-tips-parent-company-into-chapter-11-3553fd32?mod=article_inline.
Santilli, P. (2023) “Companies Whose Deposits in Silicon Valley Bank Were Just Freed,” WSJ, 13 March. Available at: https://www.wsj.com/articles/companies-with-deposits-trapped-in-silicon-valley-bank-9034f33b?mod=article_inline.
Shukry, A. (2023) “Malaysia Extends Rate Pause as Inflation Cools, Growth Slows,” Bloomberg.com, 9 March. Available at: https://www.bloomberg.com/news/articles/2023-03-09/malaysia-extends-rate-pause-amid-cooling-inflation-and-growth?leadSource=uverify%20wall.
Vishnoi, A. and Mookerjee, I. (2023) “Asia Sees Limited Contagion Risk From Silicon Valley Bank’s Woes,” Bloomberg.com, 10 March. Available at: https://www.bloomberg.com/news/articles/2023-03-10/asia-sees-limited-contagion-risk-from-silicon-valley-bank-s-woes.
Weil, J. and Eisen, B. (2023a) “Silicon Valley Bank: Tech Lender Stumbles, Causing Banks to Lose Billions in Stock Value,” WSJ, 9 March. Available at: https://www.wsj.com/articles/bond-losses-push-silicon-valley-bank-parent-to-raise-capital-125e89d4.
Weil, J. and Eisen, B. (2023b) “Silicon Valley Bank: Tech Lender Stumbles, Causing Banks to Lose Billions in Stock Value,” WSJ, 9 March. Available at: https://www.wsj.com/articles/bond-losses-push-silicon-valley-bank-parent-to-raise-capital-125e89d4.
Credits: Malcolm Wong Jun Xiang and Sherilynn Ngerng
