Silicon Valley Bank’s Failure: Causes and Implications

What’s in today’s article?

• Why in News?
• What is SVB and How Big is it?
• What went Wrong at SVB?
• What Implications might there be for India?
• What Implications might there be for the World Economy?

Why in News?

• The California-based Silicon Valley Bank (SVB), a cornerstone of the US technology and startup industries, recently failed, making it the biggest bank failure since the 2008 financial crisis.

What is SVB and How Big is it?

Image Caption: Silicon Valley Bank

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What went Wrong at SVB?

Image Caption: Timeline of Events that led to the failure of Silicon Valley Bank

What Implications might there be for India?

• The tech industry is the biggest customer of SVB with a large number of Indian start-ups, especially in the SaaS (software as a service) sector that services US clients, having accounts at the bank.
• Aside from being a banking partner, SVB had also been an important lender to several Indian start-ups when the sector in India was starting to take shape around 2010-11.
• Among its most notable fundings was an investment of a total of $1.7 million in One97 Communications, the parent company of Paytm. Other start-ups that had received funding from SVB include Bluestone and Carwale.
• While the impact of SVB’s failure will be clear in coming days, many founders said that not being able to take out more than $250,000 from their accounts will hit them hard.
• Amid a funding winter, where availability of funds for start-ups is dwindling, this could prove to be a major roadblock, especially to young businesses.

What Implications might there be for the World Economy?

• SVB is small by comparison with the nation’s largest bank – JPMorgan (with assets worth more than $3 trillion).
• A systemic bank crisis/bank runs happens when depositors lose trust in many banks and start withdrawing their deposits, preferring to keep hard cash with them.
• This is precisely what happened in 2008, when rumours about bank collapses in the US spread to India too and panicked depositors pulled money from private sector banks.

Q1) What is the 2008 global financial crisis?

It refers to the period of extreme stress in global financial markets and banking systems between mid-2007 and early 2009. A downturn in the US housing market was a catalyst for a financial crisis that spread from the US to the rest of the world through linkages in the global financial system.

Q2) What is meant by a bank run?

A bank run occurs when many customers withdraw all their money simultaneously from their deposit accounts with a banking institution for fear that the institution is, or might become, insolvent.

Source: Explained | What caused Silicon Valley Bank’s failure? | IE | ET

Video: https://www.youtube.com/watch?v=UraMIKY2CkI