The collapse of Silicon Valley Bank and its impact.

 Why did the Silicon Valley Bank collapse?

The Silicon Valley Bank(SVB) which is best known for its financial services and solutions to the technology and innovation sector. It was founded in 1988 in Santa Clara, California. It provides a wide range of financial services, which includes commercial bank, investment bank and private banking. It offers venture capital financing, asset

management, foreign exchange and treasury management. Throughout the years it had established itself as a leading bank for investment in the technology and innovation sector which is known for its high risk. Despite its success, SVB has faced its share of challenges over the years, which includes the impact of economic slowdown and changing market conditions. Also the stocks in the technology sector is facing downturn over the past few years and the hiking of interest rates by the US federal reserve to combat inflation. The reason of the collapse is that as the venture capital firms were drying up of cash and need to tap in their existing funds. So they

started withdrawing their deposits, so to meet the requirement of their customers the bank started selling its own assets. During the past few years the bank has bought billion of dollars of bonds as this is how a typical bank operate. As the demand of cash rose, the bank sold their typically safe bonds at a loss and those loss added up to that point that they became insolvent.

Why is this crisis compared to the 2008 financial crisis? 

During the 2008 financial crisis, there was a widespread failure of global financial system. The cause is the combination of various factors such as a housing bubble, subprime mortgage lending, deregulation of financial institutions and excess risk taking by the banks and financial institutions. The crisis started in the United states with the subprime mortgage which refers to the lending and

 borrowing of home loans to individuals with poor credit history, low-income levels or high debt-to-income ratio. This is what happens when the housing market collapsed and so Washington Mutual which has asset worth of $307 billion, the collapse caused

the value to mortgage to plummet, causing widespread defaults and foreclousers. This time two banks collapsed Silicon Valley Bank and Signature Bank which has combined assets of $327 billion. 

Impact on Indian Startups

SVB offered an easy way to Indian startups to park their cash especially those in the Software as a Service sector, those who has clients in the US. As they could set up their account without a US Social Security Number(SSN) or Income Tax Identification Number. When the collapse happened the US government shuts down the bank and asked companies with accounts containing 250,000 to contact a toll- free number. But still many Indian Startups who has 250,000 or more in their account have to wait several days to get their money back. Also the Indian Government also stepped in and have a meeting with the Indian Startups. The IT Ministry expected to recommend exploring options of startups being allowed to transfer money from their SVB account to Indian banks without facing taxation issues, and to urge the Finance Ministry to allow overseas branches of Indian banks to accept deposits from these startups.

Conclusion

As of now it does not seem like this is going to be a repeat of the 2008 financial crisis as most banks are far more diversified. Also the US Treasury Secretary Janet Yellen told the CBS that "Let me be clear that during the financial crisis, there were investors and owners of systematic large banks that were bailed out and the reform that have been put in place means we are not going to do that again". Although she also said that they are concerned about the depositers and are trying to meet their needs.