The Silicon Valley Bank collapse has the potential to be a turning point in the way the modern financial system functions. It is being touted as an event that is likely to have large-scale repercussions on the entire financial system.
It is alleged that the Silicon Valley Bank is definitely going to have an impact on the United States. However, at the same time, the impact of this crisis could be felt across the globe as well.
In this article, we will have a look at how the sudden fall of Silicon Valley Bank is likely to have an impact on the financial system.
- Impact on the Startup Sector: The first and foremost impact of the Silicon Valley Bank crisis is likely to be felt by the tech startup sector. Tech startups have peculiar banking requirements. They generally do not require a lot of loans.
Most of their funding is obtained through equity. A lot of these companies also do not generate a lot of revenue. In fact, in the early years, they might only be paying expenses such as salaries without much money coming in. However, at the same time, these companies need access to some of the best payment and receivables processing services in the world.
Also, tech companies tend to prefer a more automated banking system where human intervention is very less. The Silicon Valley Bank was providing these services to the startup sector. Now, since the bank has collapsed, there is likely to be a vacuum in the market. However, this also means that the operations of many tech-based startups are likely to be interrupted. This may seem like a small impact but it may have some large-scale implications.
A lot of these startup companies have high growth potential and are likely to morph into large corporations with the passage of time. However, the disruption of appropriate banking services can slow down the growth of startup companies across the globe.
- Impact of Rising Interest Rates: The sudden collapse of the Silicon Valley Bank shows the impact that rising interest rates can have on the banking sector as a whole. Up until now, it was assumed that the banking sector is able to pass on the rising costs of interest rates to consumers. That is true of the lending aspect of the business.
However, just like other corporations, banks also hold government securities. Sometimes, a large portfolio of the banks assets may be held in government securities. This exposes commercial banks to a lot of interest rate risks.
Regulators may have to come up with a framework for identifying such risks and hedging them in the future. However, the fall of Silicon Valley Bank demonstrates that no such mechanism exists as of now.
- Regulatory Changes: As mentioned in the point above, the Silicon Valley Bank crisis can be considered to be a wake-up call for regulators across the globe. It was widely believed that regulators have created mechanisms that allow banks to avoid any financial crisis or to be able to mitigate such a crisis if the need actually arises. However, as time has shown, this is definitely not the case.
It is important for regulators across the world to study the Silicon Valley Bank crisis in detail and take pre-emptive measures to avoid the occurrence of another such crisis. Increased regulatory measures by regulators across the world could also lead to an escalation in costs and a delay in providing services by banks.
Up until now, only large commercial banks had high regulatory requirements in the United States. However, now, it is likely that the regulatory requirements will be increased even for smaller regional banks.
- Weakened Confidence in Financial Markets: Another impact of the Silicon Valley Bank collapse is the weakened confidence that both the banks, as well as the investors, will have in the financial markets.
It is important to realize that the Silicon Valley Bank fiasco only happened when the company tried to sell more equity shares and the news of the banks shaky asset position came out in the open.
It is likely that if any bank faces a similar situation in the future, it will not approach the equity markets. Instead, they may approach other private and public lenders to avoid a bank run which makes a crash almost inevitable. Similarly, investors across the world may fear investing in banks and even smaller tech companies. This is because the Silicon Valley Bank crash has sensitized them to a possibility of a market crash happening almost overnight in this sector.
Venture capitalists are likely to be more careful about giving money to tech startup firms. This is because along with business and financial risks, they now also face systemic risks which could arise from the failure of the banking system.
The bottom line is that the fall of the Silicon Valley Bank is likely to have a widespread impact. This impact is unlikely to be restricted to one geography, one industry, or a particular type of investor. This collapse, just like the Lehman Bank collapse, is a historic moment that will lead to widespread changes in the global banking and financial system.