How Silicon valley bank in California could almost take the global banking system down with it? Why the shares of SVB dropped by 60% in a single day. Top 4 US banks drop 50 billion dollars in Market cap yesterday. So what just happened? let’s discuss.
What does Silicon Valley Bank do?
It is so simple. Banks rely on trust. When they lose that trust, it is going to be a blood bath. Silicon Valley Bank work exclusively with startups and venture capital firms. Silicon Valley Bank (SVB) is a specialized commercial bank that primarily serves the technology, life science, venture capital, and private equity industries. The bank was founded in 1983 and is headquartered in Santa Clara, California. The bank has also played a role in helping to finance many well-known startups, including LinkedIn, Tesla, and Uber.
What Actually Triggered Silicon Valley Bank Downturn?
It all started with US Government ‘Covid Money Printing’. Pandemic free money with zero interest rates was kind of like steroids for banks like Silicon Valley Bank (SVB). Silicon valley bank deposits went up by 90% in a single year 2021, reaching 200 billion dollars. After the pandemic, when inflation started going up, FED shutdown the tap. They went from zero interest rates to raised interest rates. So Tech companies started collapsing. Most Tech companies loose almost 30% of their market value. These lose in confidence lead to decrease in deposits by 13% in 2022 and this accelerated further in 2023.
Last Few Days
About two days ago Silicon Valley Bank came forward and admitted that they have sold all of their available ‘for sale’ securities because they needed cash. These incidents can lead to a bank run (worst case scenario). If your 10 portfolio companies (Tech Companies) are at 1 billion dollar valuation each and if they fall back 50%, then you go from a 10 billion dollar balance sheet to 1 billion dollar. This is what happened with Silicon Valley Bank (SVB).
Possible outcomes if things get out of hand:
First, let’s consider the impact on the broader financial system. A bank run or bankruptcy at Silicon Valley Bank could potentially exacerbate concerns about systemic risk and trigger a wider sell-off in financial markets. Investors could become more cautious and risk-averse, potentially leading to declines in stock prices and volatility in financial markets.
Additionally, a bank run or bankruptcy at Silicon Valley Bank could potentially lead to a tightening of lending standards and a reduction in the availability of credit or financing for businesses across a range of industries. This could have implications for companies in industries like real estate, construction, or manufacturing, which rely on credit and financing to fund their operations. In an environment of rising interest rates, this could exacerbate concerns about a potential credit crunch or liquidity crisis. Remember Lehman Brothers in 2008?
Now let’s consider the impact on the startup and venture capital ecosystem. A bank run or bankruptcy at Silicon Valley Bank could potentially lead to a contraction in the startup and venture capital ecosystem, with investors becoming more cautious and pulling back from early-stage investments. This could potentially slow down innovation and economic growth in the long term.
In an environment of rising interest rates, companies could face increased pressure to generate profits and reduce costs. If Silicon Valley Bank were to go bankrupt, it could lead to increased pressure on startups and early-stage companies to cut costs, delay product development, or even shut down entirely. This could potentially lead to job losses and a contraction in the broader economy.
Now let’s consider the impact on consumers. In an environment of rising inflation and interest rates, consumers could face increased borrowing costs and a reduction in purchasing power. If a bank run or bankruptcy at Silicon Valley Bank were to lead to wider financial instability, this could potentially lead to a decline in consumer confidence and spending. This could have implications for companies in industries like retail, travel, and hospitality, which rely on consumer spending to drive their businesses.
Finally, let’s consider the impact on the Federal Reserve’s monetary policy. In an environment of rising inflation and interest rates, the Federal Reserve could potentially be forced to tighten monetary policy more aggressively in response to a bank run or bankruptcy at Silicon Valley Bank. This could potentially lead to further market volatility and a slowdown in economic growth, as borrowing costs increase and businesses cut back on investment and hiring.
In The Nutshell
But what is much worse is, Silicon Valley Bank is not the only bank who has this issue. They are not the only bank who is sitting on a bunch of unrealized losses. It like a ticking time bomb, let’s hope it will not explode. If things go south, what happens to housing market in 2008 might happened to Tech Companies in coming months. This could lead to a stock market downturn. Let’s hope this will not escalate further. Let’s hope for the best.