Silicon Valley Bankruptcy: A Banking and Technological Headache

Silicon Valley Bankruptcy: A Banking and Technological Headache

The specter of the 2008 financial crisis is looming over global markets. Everyone brings back memories of the great collapse, and links them to the bankruptcy of the ancient American Silicon Valley Bank (SVB), which represents the largest bankruptcy in the United States since the closure of the Washington Mutual Savings Bank 15 years ago.

California start-up founders are panicking regarding accessing their massive $175 billion-plus cash in the bank and paying employees. Contagion fears have reached Canada, India and China. In the UK, the SVB branch is set to default, has already ceased trading, and is no longer taking on new clients. On Saturday, the leaders of nearly 180 tech companies sent a letter asking UK Chancellor of the Exchequer Jeremy Hunt to intervene. “The loss of deposits has the potential to paralyze the sector. Many companies will be forcibly liquidated overnight. This crisis will begin on Monday, so we call on you to prevent it now,” they said in the letter, which was seen by Bloomberg.

And this is only the beginning, as the American bank has branches in China, Denmark, Germany, India, Israel and Sweden, and the warnings confirm that the failure of the bank will eliminate a large number of emerging companies, especially technological ones, all over the world in the event that governments do not intervene.

The story of the bank’s collapse, which was made public on Friday, is inseparable from the crisis facing the global economy, which widened with the Corona closures, and became entrenched with the Russian war on Ukraine. The main reason for the collapse was the US Federal Reserve raising interest rates, spoiling investors’ appetite for risk, and the decline in the value of bonds in which Silicon Valley Bank invests regarding $92 billion.

The Fed has raised interest rates from their record lows regarding eight times since last year, in an effort to combat inflation. Usually, investors’ appetite for risk decreases when the funds available to them become very expensive due to the high interest rates. High interest rates The collapsed bank incurred losses amounting to regarding $15 billion, representing the value of the decline in those bonds it held in its portfolio. This affected tech start-ups, which are Silicon Valley’s primary clients, because it made their investors more reluctant to buy stocks.

As high interest rates shut down the IPO market for many startups and made raising private funds more expensive, some Silicon Valley bank clients began withdrawing money to meet their liquidity needs. The bank was unable to meet these needs.

To fund these withdrawals, the Silicon Valley bank on Wednesday sold a $21 billion bond portfolio made up mostly of US Treasury bonds. However, this portfolio achieved an average return of 1.79 percent, which is much lower than the current 10-year Treasury bond yield of regarding 3.9 percent. Indeed, the bank was forced to admit a loss of $1.8 billion, which it needed to meet the capital increase. This was accompanied by an influx of depositors to the bank’s headquarters to withdraw nearly $42 billion at the end of the week.

To remedy this, the bank’s management, with the help of advisory services from Goldman Sachs, chose to raise fresh capital from the sale of shares of the venture capital firm General Atlantic, as well as the sale of $2.25 billion in convertible notes to the public, to bridge the financing gap.

However, it ended trading in its shares on the same day, down by 60 percent, as investors feared that deposit withdrawals might push the bank to increase capital. This drop reinforced the panic of investors, who rushed to sell their shares massively, and also since most of the bank’s clients have more than $250,000 in their accounts, which is the maximum that the US authorities usually repay in the event of bankruptcy, many of them tried to withdraw their money, which accelerated the bank’s collapse. .

On Friday, the bank tried to find alternative financing, including selling the company. Later the same day, the Federal Deposit Insurance Corporation (FDIC) announced that the bank would be closed and placed in its own receivership, and said that it would seek to sell SVB’s assets and that future dividends might be paid to uninsured depositors.

The bank and its advisors may have also committed a tactical error, according to the New York Times. The investment in General Atlantic shares might have been completed overnight, but the bank’s management also chose to sell the convertible preferred shares, which cannot be sold until today. the next. This allowed time for investors and, more importantly, customers, to become increasingly suspicious and confused, leading to an exodus of deposits. And the American newspaper considers that it seems that the collapse might have been avoided, as it happened because the administration erred in how it communicated with its customers and the public, and created a trust vacuum.

The bank’s deposits have more than quadrupled in four years (from $44 billion in 2017 to $189 billion at the end of 2021), while its loans to emerging companies have grown from $23 billion to $66 billion. Bond prices, the bank became uniquely exposed, and customers reduced their deposits from $189 billion at the end of 2021 to $173 billion at the end of 2022.

The bank suffered from its focus on a specific type of clients, as it was financing mainly companies in the fields of technology and biotechnology related to health, and it was part of the capital environment controlled by risks, but between raising interest rates that caused the cost of loans to rise, and the difficulties of the technology sector itself, Bank customers have withdrawn a lot of money in recent months.

And the Silicon Valley bank crisis has led to a new headache shaking the technology sector in the world, as technology leaders in Asia scramble to assess the potential repercussions. In Singapore, financiers and entrepreneurs got together to talk regarding the fallout, while startup founders and investors talked regarding it at a conference in Mumbai.

“The impact of the SVB incident on the technology industry should not be underestimated,” analysts led by Liu Zhengning of China International Capital Corp. said in a note. “Deposits are essential for technology startups because they generally require a lot of money to pay for exorbitant expenses, including research and development costs and salaries.” employees”.

They continued: “If cash deposits evaporate in the process of bankruptcy or restructuring, some technology companies may face severe cash flow stress. Bankruptcy risks should not be ruled out.”

SVB clients in California, many of them startup founders, stood outside the bank’s branch on Silicon Valley’s famous Sand Hill Avenue in the cold and rain on Friday, knocking on closed glass doors and trying to persuade representatives of the Federal Deposit Insurance Corporation to withdraw their money.

The founder of technology startup Kiko, Alexander Fitzgerald, noted that the financial resources of UK startups are already depleted due to the slowdown in the venture capital funding market. “British start-ups need the Treasury to step in quickly,” he said.

In Canada, the distressed bank branch reported $314m in secured loans last year, double the C$212m in the previous year, regulatory filings show.

And the effects extended to the cryptocurrency market, the most recent of which was the loss of the US cryptocurrency “Circles Coin” pegged to the dollar from its value to 87 cents, following the company revealed that it had nearly 8 percent of its $40 billion in reserves tied up in the collapsing Silicon Valley bank.

The question “Who’s next?” On the talk of investors and analysts’ reports, amid excluding the repetition of the 2008 scenario, however, according to the analytical site Forex Live, fear will continue on Monday in all markets, until there is a solution for the bank’s depositors.