The Rise & Fall Of Silicon Valley Bank

If you're an investor, work in banking or simply someone who stays abreast of finance news you would have heard about the collapse of The Silicon Valley Bank.

The bank has been in their own words "The financial partner of the innovation economy".

It has helped individuals, investors, and the world’s most innovative companies achieve their ambitious goals. From global commercial banking to private banking, wealth management

investment banking, venture capital, and credit investing - SVB did it all.

The bank's total assets were worth $212bn, giving it the moniker of the 16th-largest bank in the US. A 40-year-old bank, SVB has been a banking partner for groups such as Cisco, Beyond Meat, and Shopify when the brands were still young. The bank claims to serve 50% of all start-ups and VC funds in the US. 

Now, it's under the scanner as what many are calling America's biggest banking failure since 2008. Over this weekend, Indian Saas firms were running from pillar to post trying to transfer their deposits.

What Went Wrong?

A well-established and dominant player in the startup ecosystem for years, SVB provided banking services to early-stage companies and venture capital firms. However, between 9th March and 10th March 2023, SVB suffered a sudden and what many would describe as a shocking fall due to a series of unfortunate events.

One of the major reasons for the downfall of SVB was the investment losses it incurred in its treasury investments. As interest rates rose rapidly over the last 12 months, the bank's bets on these investments went wrong, leading to a loss of almost $2 billion. Despite this setback, the bank's core business of lending and deposit-taking remained stable. 

How Did This Impact The Bank's Stock?

To recover from the treasury loss and mismatch in the timing of certain cash flows, SVB announced a fund-raising plan. However, this plan was not perceived to be enough to mitigate the panicked response of depositors who started withdrawing their money from the bank.

This resulted in a bank run, which worsened the bank's cash flow mismatch and started an out-of-control spiral. The bank's stock plummeted by 60% overnight, leading to regulators taking over the bank and closing it down. 

What Will Happen Now?

U.S. Treasury Secretary Janet Yellen, US central bank chief Jerome Powell, and FDIC Chairman Martin Gruenberg have approved a resolution plan where all depositors of SVB will be returned their money in full starting Monday.

HSBC Holdings has recently announced that its UK ring-fenced subsidiary, HSBC UK Bank plc, will be acquiring Silicon Valley Bank UK Limited (SVB UK) for £1.

The fall of SVB is also likely to increase anxiety for stock investors. China's CSI300 Index for example fell 4% last week and Hong Kong's Hang Seng index plunged 6%.

How Does This Impact Grip And My Investments?

Grip does not bank with SVB and none of our capital is impacted by this development. The 120 companies that have worked with Grip also do not have any risk on their capital. Hence none of your investments are impacted by this development. We have always believed in having a robust diligence process, especially monitoring the quality of financial institutions a company works with. 

This incident highlights the need for sustainable and diligent practices in the finance industry. At Grip, we truly believe that trust is the most important currency in finance, and it must be protected at all costs. The failure of SVB should serve as a warning to other financial institutions to be cautious and conservative in their investment strategies, especially in times of volatility.

For Indian startups, this incident reiterates the importance of diversification and minimising exposure to overseas banks. While it is okay to have some reliance on US funds, it is crucial to ensure that most of not all your money is in India, minimising the risk and impact of such incidents on the Indian startup ecosystem.

Overall, the sudden fall of Silicon Valley Bank should serve as a wake-up call for the finance industry. The need for responsible and sustainable practices has never been more apparent. It is crucial to maintain trust and protect the interests of customers and stakeholders to ensure the long-term stability and success of financial institutions.