In the second week of March 2023, the Silicon Valley Bank, which is headquartered in Santa Clara California collapsed in spectacular fashion. The shares of the bank fell by over 60% in one day. There was a classic run on the bank which led to a collapse almost overnight! This created a panic-like situation across the United States and even across the entire world. Stock markets across the world started plummeting in reaction to this bank failure.
However, the irony is that many people had not even heard the name of Silicon Valley Bank prior to the collapse. Why is it then that the Silicon Valley Bank was a big financial event which has the potential of bringing a sustained slowdown in the global markets?
In this article, we will try to understand why Silicon Valley Bank was important to the financial system.
- Size of the Bank: First and foremost, it is important to realize that Silicon Valley Bank was a large financial institution. Contrary to popular belief, it was not some obscure financial institution.
The fact of the matter is that the bank was not focused on providing services to individual customers. As a result, it did not have a significant presence in retail banking. However, the bank had accumulated more than $220 billion in assets and as a result, was the 16th largest bank in the United States of America.
In fact, it was one the largest banks which were still being regulated as a regional bank in the United States. As a result, it can be said that even large banks in the United States are not immune to a sudden collapse. This is being viewed as a commentary on the United States and even on the global banking system.
- Focuses on Tech Sector: Another important characteristic of the Silicon Valley Bank is that it focused almost exclusively on the early-stage companies in the tech sector. It is estimated that anywhere between 50% to 65% of all early-stage tech sector companies were being served by the Silicon Valley Bank. Hence, it can be said that the sudden fall of the Silicon Valley Bank will cause service disruption to these companies.
Now, these early-stage tech companies have very peculiar financial requirements. A lot of these companies do not take loans. Instead, they rely on equity financing received from a small group of venture capital investors. Also, most traditional banks do not let them access the full scope of financial services. The sudden collapse of Silicon Valley Bank calls its business model into question.
Is it sustainable for a bank like Silicon Valley Bank to focus exclusively on one set of customers? In the short run, it may create success. However, can a bank that is exclusively focused on just one sector withstand the test of time?
- Shows Quick Speed of Collapse: The fall of Silicon Valley Bank once again shows just how quickly the American banking system can end up in turmoil. Till the first week of March 2023, there was absolutely no perceived threat to the Silicon Valley Bank and to the banking system as a whole. However, within a matter of weeks, the 16th largest bank has collapsed.
There is widespread fear of contagion amongst American banks and also amongst corporations that were being serviced by the Silicon Valley Bank. The lightning pace with which the situation has changed and the crisis has been triggered has sent alarm bells ringing.
Investors across the world are now wondering how many more such banks are out there and what the impact of their failure could be on the overall banking system.
- Shows Impact of Safe Investments: The last collapse of the banking system was triggered by risky behavior being undertaken by banks. For instance, Lehman Brothers and other banks were meddling in risky mortgage-backed securities. However, when it comes to Silicon Valley Bank, there was no risky behavior.
Instead, the bank can be considered to be very conservative since more than 50% of its assets were held in United States treasury bonds. The United States treasury bonds are considered to be one of the safest investments in the world. It is for this reason that regulators across the world do not consider a high concentration of these assets to be dangerous. However, the collapse of the Silicon Valley Bank will change that assumption.
Now, regulators across the world will have to identify banks that have a huge exposure to government bonds and as a result, have a huge exposure to interest rate changes. The collapse of the Silicon Valley Bank will change the way in which the global banking system views risk.
- Regulatory Response: Last but not the least, the regulatory response to the Silicon Valley Bank crisis is being viewed carefully in many parts of the world. This regulatory response will be considered to be the benchmark in the future.
If any more banks do face financial trouble in the future, the actions taken by different regulators across the world are likely to mirror the actions which are being taken now by American regulators.
The fact of the matter is that the fall of Silicon Valley Bank is not some obscure event that impacts only a handful of tech investors. It is an event that will have a permanent impact on the way banks function across the globe.