On 10 March 2023 Silicon Valley Bank (SVB), one of the biggest in the US and a specialist in technology company lending was closed by California regulators because of concerns over its balance sheets. This marked the biggest banking collapse since the 2008 global financial crisis and the fall of Washington Mutual. The UK arm of SVB had loans of around £ 5.5 Bn and deposits of around £6.7 Bn. For the financial year ending 31 December 2022, SVB UK recorded a profit before tax of £88 million. SVB UK’s tangible equity is expected to be around £1.4 billion.
SVB was exempted from stringent bank regulations in 2018 because it was considered ‘small’. After the aftermath of the 2008 financial crisis, there was the Dodd-Frank Act to ensure that big banks will not fail and result in government bailout. However, in 2018, the regulation was lessened and allowed financial institutions to load up on risk.
When asked about the implications of the transaction on the UK economy, Jed Rose from Partner from Antler Global “Overall, we are delighted with the industry’s collaboration to deliver this outcome. A small number of Antler founders used SVB for their banking needs. Prior to transfers, less than 1% of Antler’s current portfolio value was exposed to SVB. We were quick to support our portfolio companies through group sessions to answer common questions and 1:1 meetings to provide bespoke guidance. Antler will keep on closely monitoring the situation, leveraging our extensive global network. The longer-term prospects for venture and innovation remain positive”. Antler is currently investing in founders across 6 continents and 23 cities in the world, including in India.
What led to Ceasure of the Leading California-based tech bank
In 2020 and 2021, the bank’s deposit base rose by USD 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, 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”, says Suman Bannerjee, CIO, Hedonova, a US based Hedge Fund investing in alternative assets such as NFTs, Crypto and P2P lending on the NIFTY Crash.
Several US based tech companies which raised capital at a lower interest rate deposited its money to SVB. The leadership at SVB decided to take a risk in search of a slightly higher return by putting many of these deposits into longer term government bonds which had a slightly higher pay-off. However as interest rates increased, news of SVB’s perilous position spread in a tight-knit tech sector and USD 42 billion in deposits flowed out of the bank in one day.
“Many of these businesses being young, need to understand the importance of being profitable and multi-banked – stable and new banks. The geo-economic and geopolitical risks that effect businesses has be considered while investing in a country. In the past, the Chinese capital influence on the American markets was very high, which was in turn invested into stocks, VC funds etc. SVB may have also had a lot of Chinese capital which have no lost its value. The acquisition of SVB’s UK arm, was a strategic play by the UK government to develop stronger alliance with USA”, says Gaurav Singh, Co-founder of leading UK-based VC firm JPIN.
This became the biggest American financial institution to fall since the 2008 crisis. Its fall was swiftly followed by that of another bank – Signature Bank, which had over USD 110 billion in assets and was the third largest failure in American history. Stocks of several regional banks, including First Republic and Signature Bank, are under the water, reacting to the SVB debacle. Given that these banks could be faced with ALM structures, the increasing interest rates could pose threat to some of them, though a mass-scale fall out hasn’t cascaded yet.
The overnight acquisition of SVB’s UK arm by HSBC secures the deposits of over 3,000 SVB UK customers with deposits of more than $US8.1 billion. SVB UK has loans of around $US6.6 billion. HSBC injected nearly £2 billion into the United Kingdom arm of collapsed United States-based Silicon Valley Bank – which it bought this week for a nominal £ 1 and is ready to ‘deploy more cash and liquidity as needed’, according to a LinkedIn post by HSBC UK CEO Ian Stuart.
Impact of the SVB collapse on the Indian Economy
- Effect on the Banking Sector:
The question arises that, are top Indian banks, especially the domestic systemically important banks (D-SIBs) – popularly known as too-big-to-fail — with operations outside, safe and sound in the era of start-ups and digitisation, in the wake of the SVB collapse, going to suffer effects on its markets.
Experts opined that the reasons for SVB’s failure are unlikely to play out in India as domestic banks have a different kind of balance sheet structure, according to bankers. The approach of the banking regulator is to protect the money of the depositor at any cost. The rescue of the Yes Bank collapse in India is a classic example in this case, where a lot of liquidity was provided to support it stabilisation.
- Effect on the Tech Sector:
SVB through its parent entity holds investments in Bluestone, Carwale, InMobi, and Loyalty Rewardz. Therefore, a direct impact on the Indian start-up and/or new economy cannot be ruled out. Further, YCombinator one of the key clients of SVB has in turn invested in over 19 start-ups in India. Therefore, we cannot rule out a second-order impact. The funding winter, which was already catching up in the start-up space, may intensify.
Indian financial system could get impacted if the exporters who are dependent on US market start seeing slowdown in their businesses and that would impact job growth and ability to repay debt to their banks. A lot of venture capital investment coming into India would also slow down. 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.
A large number of Indian startups which do not have even an employee or an office in the US had opened up their accounts in the Silicon Valley Bank as it let them do so without much regulatory questions and with a customer-friendly approach. When asked on the domino effect of the bank’s collapse on the Indian economy, Gaurav Singh remaked, “India is going to become a USD 26 Trillion economy over the next few years. In fact, as a result of this collapse of SVB, the funding inflow into the Indian economy from USA can further increase due to the strong geopolitical position of India. In fact, during the period of investment winter, which may take place from 18 months from July 2023, the world should look at developing long-term ties with India. Further, cross-pollination of funds and diversification of the investment approach is also imperative to protect businesses”.
Two risk modelling issues were not recognised by SVB risk managers or regulators. These are: (1) assets and liabilities must be managed under risk, particularly that of interest-rate changes, and (2) the problem of correlation must be recognised, which for SVB was that their depositors – funded by a small number of venture capitalists who were also well connected with each other – could withdraw funds at the same time.
Way Forward for the Indian Economy
The implications of the SVB collapse in India can be two-fold. Firstly, there is a nervousness in the stock market, in how investments are being made in the baking sector which may slow down over the next several months. However, due to the stable geopolitical situation and accelerated growth of the country, US investors may diversify their portfolio further by investing in the Indian startup ecosystem. Moreover, several investors remarked that businesses in India can now expect more funding from American investors. India has one of the fastest-growing economies in the world and shows no signs of slowing. According to the United Nations Conference on Trade and Development (UNCTAD) Trade and Development Report 2021, India’s economy is projected to grow at 6.7% in 2022 – the fastest in the world during the year. India has been attracting high foreign investments globally and foreign investors are very eager to invest in the various sectors of the country. With rapid growth across the economy and innovations in manufacturing, digital and information technology, India is proving to be an exciting investment for American investors. Additionally, India is home to a rapidly growing economy, the largest youth population in the world, and rising global competitiveness.Investors hold the opinion that this will augment the overall growth of the country’s GDP, and international trade.
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