The recent crises of Silicon Valley Bank in the United States has emerged as a significant financial setback, akin to the Lehman Brothers’ collapse in 2008. Established in 1984 in the heart of the Silicon Valley, the bank has been instrumental in providing loans and funding to new startup enterprises, facilitating their growth and expansion. Over the years, it has played a crucial role in deposit and loan services, particularly for the emerging startup ecosystem in California’s technology hub. However, the current crisis has brought to light the bank’s vulnerability to market fluctuations and risks, resulting in a potential ripple effect on the broader economy.
The bank’s loan portfolio primarily consisted of venture capitalists, with a substantial 56% allocated to fund new startups as of the last report. In 2019, the bank reported a deposit amount of 61.76 billion dollars, which grew exponentially to 189.20 billion dollars by the end of 2021, representing a staggering growth rate of 206%. Despite this impressive growth, the COVID-19 pandemic dealt a severe blow to the startup ecosystem, leading to a significant rise in inflation. The Federal Reserve responded to this inflationary pressure by hiking the repo rates, leading to a spike in the ten-year US government bond yield. In turn, many investors began withdrawing their investments from the startup ecosystem and moved towards safer investments in government schemes with higher bond yields. Despite the challenges, the banking system continued to operate efficiently.
The bank faced a significant challenge in managing the interests of depositors, as they had to pay out returns to them while simultaneously earning profits. In an attempt to maximize their returns, the bank started investing in mortgage-backed securities bonds backed by home loans. However, a major problem emerged when the yield on the US 10-year bonds exceeded the bank’s portfolio returns. Consequently, the bank was forced to sell its loan book portfolio to other investors to release its funds at a lower percentage. In a bid to free up capital and address the imbalance, the bank divested its portfolio of mortgage-backed securities bonds amounting to 21 billion dollars to other investors, allowing it to manage its assets more effectively. The incident led to a shock among investors and depositors, leading to a significant withdrawal of funds from the bank. The management of the bank requested the investors to stop pulling out their deposits, but it had a domino effect, leading to a steep 60% decline in the bank’s stock price on NASDAQ. To raise funds worth 21 billion dollars, the bank suffered a loss of 1.88 billion dollars. There are rumors that the bank might sell off more assets to raise funds, although we cannot make any conclusive claims about it. The trading of the bank’s stock has been halted, and there are reports floating in the market about the potential sale of the bank. Despite the uncertain circumstances, we cannot make any conclusive statements about the bank’s future.
The final question that arises is the potential impact of this crisis on the Indian banking system. It is evident that Indian startups have links and deposits with Silicon Valley Bank, which implies that the banking system might be adversely affected. At this moment, it is difficult to ascertain the extent of the potential fallout or the precise effects on the Indian banking system. However, it is clear that Monday’s developments will provide a clearer picture of what may happen to Silicon Valley Bank and, consequently, the impact on the Indian banking system. It is a developing situation, and we must be vigilant and cautious in assessing the potential implications.
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Nice information 👌