Silicon Valley Bank Collapse: What Happened and Impact on Singapore

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Another blow has hit the technology sector with the collapse of Silicon Valley Bank (SVB), the go-to specialized bank for tech companies.

The collapse of Silicon Valley Bank impacts startups, jobs, and global financial stability. PHOTO: Ian C. Bates

Another blow has hit the technology sector with the collapse of Silicon Valley Bank (SVB), the go-to specialized bank for technology companies, following a bank run. This collapse is a significant setback for the industry, which had already suffered mass layoffs earlier in 2022 and 2023. This is also the largest bank failure since Washington Mutual in 2008.

To protect customer deposits, the U.S. government has intervened, while HSBC plans to purchase the U.K. arm of Silicon Valley Bank. Signature Bank, another regional bank, was also on the brink of collapse, prompting the government to guarantee deposits.

The collapse of Silicon Valley Bank is likely to have implications for tech companies and startups in the future. It underscores the risks associated with financing in the technology sector, and raises questions about the sustainability of venture capital-backed business models. It also highlights the need for financial institutions to be vigilant about risk management and diversification, and for regulators to monitor the financial health of banks more closely.

What is Silicon Valley Bank?

Founded in 1983, SVB was a leading U.S. bank that focused on financing and banking services for startup companies, particularly those backed by venture capital firms, with a strong emphasis on technology companies.

The bank had a significant client base of venture capital firms and technology executives, and was headquartered in Silicon Valley. As of the end of 2022, the bank had assets worth $209 billion, according to the Federal Deposit Insurance Corporation (FDIC).

However, despite its success, the bank eventually collapsed, leading to significant losses for creditors and raising concerns about the risks associated with financing in the commodity sector.

Another Hit for Tech

SVB was a highly regarded financial institution in the tech and healthcare sectors, providing financing for nearly half of all U.S. venture-backed companies in these industries. The bank was known for its willingness to support startup companies that were deemed too risky by other banks.

During the pandemic in 2020, the tech industry experienced a surge in demand for digital services and electronics, resulting in a significant increase in revenue for tech companies. As a result, SVB’s services were in high demand, as it helped tech companies manage their cash flow for business expenses such as payroll. Like other banks, SVB invested much of these deposits to generate returns.

Why Did it Collapse?

The collapse of Silicon Valley Bank was caused by various factors, including a lack of diversification and a classic case of a bank run where customers withdrew their deposits due to concerns about the bank’s solvency. Startup companies made up a significant portion of SVB’s depositors, depositing large amounts of cash from investors during the pandemic when the demand for technology was high.

Bank Run

On March 6, when Silicon Valley Bank announced its plans to raise $1.75 billion in capital, concerns about the bank’s solvency arose. This news spread quickly, causing customers to withdraw their money in waves. The following day, SVB’s stock price dropped by 60% after the announcement.

The bank was shut down by California regulators on March 8 and placed under the FDIC. Unlike personal banking, SVB’s clients had larger accounts, and most had deposits exceeding the $250,000 FDIC limit. As a result, the bank run quickly depleted the bank’s funds, and the pace of withdrawals continued to escalate, creating a snowball effect.

Many startups relied heavily on their primary account with SVB to manage their working capital, leaving them vulnerable when the bank collapsed. Most of their funds were tied up in their SVB account, and they needed access to their deposits to pay for essential expenses such as payroll and bills.

Lack of Diversification

Silicon Valley Bank invested a significant portion of its bank deposits in long-term U.S. treasuries and agency mortgage-backed securities, which are known to be vulnerable to fluctuations in interest rates. When the Federal Reserve increased interest rates in 2022 to combat inflation, SVB’s bond portfolio began to decline. Had they held onto these bonds until their maturity date, the bank would have likely recovered its capital.

In 2021, Silicon Valley Bank shifted its focus from short-term lending to long-term securities such as treasuries to generate higher yields. However, they did not safeguard their liabilities with short-term investments, making it challenging to liquidate their assets quickly. This lack of liquidity left the bank insolvent for several months.

When economic factors affected the tech sector, many of SVB’s customers withdrew their money as venture capital became scarce. The bank did not have the necessary funds on hand to liquidate these deposits because most of its investments were tied up in long-term securities. The bank was forced to sell its bonds at a significant loss, which caused anxiety and financial hardship for both customers and investors.

After disclosing the sale of assets, Silicon Valley Bank collapsed within 48 hours.

Broader Implications:

The collapse of SVB highlights the risks associated with financing in the commodity sector. Commodity markets are notoriously volatile, and financing these businesses can be risky. This collapse has exposed the risks that financial institutions take when they invest in these sectors.

The collapse of SVB may also have a ripple effect throughout the financial system. The failure of a major financing company could impact the creditworthiness of other institutions, leading to a tightening of credit and higher borrowing costs.

Why Do They Matter to Singapore?

Singapore is a major financial center in Asia, and the collapse of SVB highlights the risks associated with financing in the region. As Singapore continues to position itself as a hub for commodity financing, it must be aware of the risks associated with such activities.

The failure of SVB may also impact the reputation of Singapore’s financial industry. Singapore has worked hard to establish itself as a trusted financial center, and the collapse of a major financing company could undermine that reputation.

Implications on Singapore

Financing Implications

The collapse of SVB will likely have several effects on Singapore’s financial industry. Firstly, it could lead to a decrease in investor confidence in Singapore’s commodity financing sector, as investors may be more hesitant to invest in a sector that has experienced such a significant failure. This could impact the availability of financing for commodity businesses in Singapore, potentially leading to a slowdown in the industry.

The collapse of SVB may also lead to increased regulatory scrutiny of Singapore’s financial industry. Regulators may investigate the practices of financial institutions that were involved with SVB or other similar companies, potentially leading to stricter regulations and higher compliance costs for the industry as a whole.

Furthermore, the failure of a major financial institution like SVB could impact the creditworthiness of other institutions in Singapore, leading to a tightening of credit and higher borrowing costs. This could impact businesses and individuals who rely on credit to finance their operations or investments.

The collapse of SVB could also impact Singapore’s reputation as a trusted financial center. Singapore has worked hard to establish itself as a hub for finance and investment in Asia, and the collapse of a major financing company could undermine that reputation. This could potentially lead to a decrease in foreign investment and a slowdown in the growth of Singapore’s financial industry for the foreseeable future.

Impact on Startups

Startups in Singapore may face more significant challenges securing financing and accessing banking services. This, in turn, could impact job growth and the overall health of the startup ecosystem in the country. Those that had their financing and capital tied up in SVB may also face liquidity issues in the short run, forcing layoffs in attempts to reduce expenditure.

Moreover, the collapse of SVB underscores the importance of diversification and risk management in the banking industry, which could lead to increased scrutiny and regulation of financial institutions globally. It may also prompt startups and investors to reevaluate their banking relationships and look for alternative financing options.

Impact on Jobs

SVB was known for providing financing and banking services to many venture capital-backed technology and healthcare companies, which were responsible for creating numerous job opportunities in Singapore’s startup ecosystem.

With the bank’s collapse, startups in Singapore may find it challenging to secure financing and access banking services, which could potentially stall their growth and expansion plans. This, in turn, may lead to a slowdown in job creation and have broader implications for the country’s economy.

As mentioned previously, the sudden loss of funding and banking services could force startups to downsize their operations, leading to job losses in the sector. If startups are unable to secure alternative financing options, they may be forced to shut down altogether, resulting in more significant job losses.

One to Watch Carefully

The impact of SVB’s collapse is likely to have far-reaching consequences for the technology and healthcare industries, as well as the broader financial landscape. It serves as a reminder of the need for financial institutions to prioritize diversification, risk management, and liquidity to ensure the stability and sustainability of the global banking system.

In local context, startups in Singapore may face significant challenges in securing financing and accessing banking services, potentially stalling their growth and expansion plans. This might seriously affect the state of the job market in Singapore and is definitely an incident that we should all keep an eye on on how it develops.

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