13th March - Silicon Valley Bank Crisis
Welcome to today's podcast, in which we will discuss about the recent crisis at Silicon Valley Bank (SVB), one of the most prominent bankers in the start-up ecosystem. This crisis is shaping up to be one of the worst banking crises post the Global Financial Crisis.Established in 1983, SVB has been one of the major bankers to the start-up ecosystem. In the past two years, SVB's deposit book has grown threefold, to over $190 billion. However, the bank was unable to grow its loan book at a comparable rate. Hence the bank had invested over $80 billion in long term securities such as Mortgage-Backed Securities (MBS).SVB invested short-term liabilities, such as term deposits from start-ups, into long-term assets, specifically Mortgage-Backed Securities. Unfortunately, this created an Asset Liability Mismatch, which became problematic when the Federal Reserve increased interest rates. The value of SVB's assets fell, while the liabilities remained the same. At the same time as Fed reduced liquidity, due to which the venture capital money started drying up. Start-ups, instead of, depositing additional money started withdrawing money from SVB. To summarize, the price of SVB’s assets declined, and the depositors started asking for money. The only option available was to sell their assets at a loss. On 9th March, SVB Financial Group, the parent company of SVB bank announced that they have sold securities worth $21 billion of their portfolio at a loss of $1.8 billion and were raising another $2.25 billion in equity and debt to restructure its balance sheet. The announcement shook investor confidence, who believed that SVB had enough liquidity and would not need to sell their portfolio.The last nail in the coffin which escalated the situation was the collapse of Silvergate, a bank that primarily catered to the crypto industry. This further deteriorated the sentiment and led to significant deposit outflow from the bank by the start-up industry. Many venture firms started advising their portfolio companies to withdraw their funds from SVB.This crisis can be encapsulated into 4 key issues1. Correction of Asset prices,2. Deposits growth being stagnant,3. Depositors withdrawing their money and creating a run on the bank4. Poor Investor sentimentAs a result Moody’s has downgraded the issuer rating of SVB to “C” from “Baa1”Since the bank has collapsed, experts in the industry are concerned about a wider implication on the health of the start-up ecosystem. As many start-ups have their deposits with SVB, the inability to access their funds could lead them to default or delay payments to various parties, such as employees and vendors.US regulators are now all hands on deck to salvage the situation. It remains to be seen whether this snowballs into a widespread crisis or remains restricted to a bank and its depositors. We continue to monitor the situation and will provide updates as more clarity emerges. latest episode!
