How Silicon Valley Bank Collapsed-All about the Crisis!

Across the Globe there are three US regional banks that failed which includes Silicon Valley Bank, a California lender which largely serves startups and tech companies.

How did SVB does it Function?

About half of US venture-backed technology and healthcare startups received funding from SVB. This bank operates by taking money from investors at low interest rates and lending it to startups primarily tech startups at higher interest rates and this is how it operates.

What went wrong with the Bank that leads to its Failure?

To operate, Bank need capital and if they don’t have it, then how can they lend the money? If they can’t lend money, how can they earn interest revenue, which is the bank’s largest source of income.

Now as SVB majorly lend its money to tech companies/startup, as we all are aware of the tech startups has been greatly impacted by the current economic downturn.

The money that SVB lent to tech startups is now NPA (non performing assets) due to their poor performance, which is making them run out of capital. Interest income is also eroding over time, which reduces the bank’s liquidity. To increase the bank’s liquidity right now SVB would sold $21 billion worth of securities and shares in the near future in order to preserve their liquidity condition. This will be done so that they would have an acceptable quantity of liquidity. Due to all of these developments, the large investors who all made deposits with banks began to worry that the bank would fail or lend money to businesses that would never pay them back

The fundamental issue

The fundamental issue is that many individuals believed that venture capitalist funding were the only reason why SVB Bank was still operating, however this is untrue. In the banking industry, all banks are linked together in a system that is known as the banking system. Several banks have invested in SVB, and SVB has also made investments in larger financial institutions like Bank of America, Wells Fargo, and J.P. Morgan Chase.co. This mechanism aids the bank’s cash flow. Thus there is a greater likelihood of a systemic default if in this circumstance a minor bank also defaults. The biggest issue will be faced by loss-making firms supported by venture capitalists and angel investors.

“When tech startups are failing and there is a recession panic situation, Indian VCs and PE firms had earlier sent advisories to portfolio companies urging them to withdraw funds for SVB accounts”

The Silicon Valley Bank collapse has sparked panic across Indian markets.

1. Investors are currently on edge, as the collapse of Silicon Valley Bank (SVB) leaves a ripple effect in the Indian share market.

2. They want to be sure that their money is safe and that they will be able to get a good return on their investment

3. Investors are concerned about the security of their investment, the potential for profit, and the level of risk.

4. They also want to be sure that the investment is appropriate for their risk tolerance

The worst possible scenario that could have happened to investors came true, and almost everyone wondering how such a big name could go down. This has not only shaken the confidence of investors in India but also opened up a can of worms that is likely to take some time to heal.