Roving Periscope: SVB’s sudden crash raises fears of a Lehman Brothers 2.0 wave

Virendra Pandit

New Delhi: Lehman Brothers Inc., an American global financial services firm founded in 1847, filed for bankruptcy in 2008, causing a meltdown in the banking industry and triggering a global financial crisis. At that time, Lehman was the fourth-largest investment bank in the United States, with about 25,000 employees worldwide.

In contrast, California-based Silicon Valley Bank (SVB), founded only in 1983, collapsed on Friday this week, sending a Lehman-type shockwave globally. It was among the largest banks in the US, and the biggest in Silicon Valley, based on local deposits, with a nearly 30 percent market share in 2016.

The media reported that its abrupt collapse on Friday sent shockwaves across the startup community, which believed this lender was a reliable source of capital and deposit partner, particularly for some of technology’s behemoths.

After the panicked depositors tried to withdraw USD 42 billion on Thursday, the US regulators, the Federal Deposit Insurance Corporation (FDIC), shuttered SVB on Friday and took control of its deposits worth USD 175 billion, in what is seen as the biggest retail banking failure since 2008. The move came after a dramatic 48 hours that saw the high-tech lender’s share price plummet amid a run on its customers’ deposits.

After making a huge fortune by investing in technology startups, SVB invested most of its assets in US bonds. To bring down the inflation rates, the US Federal Reserve began raising interest rates in 2022, which brought down the bond value.

When Covid-19 struck, startup funding also dried up in 2020, which forced many clients to pull their money out. It forced the SVB to sell some of its investments when their value had declined.

The FDIC created a new bank, the National Bank of Santa Clara, California, which will now hold all the assets of SVB. It also assured the depositors of full access to their insured deposits after the branches of the new bank opened on Monday morning and that SVB’s cheques would also be honored.

On Friday, technology companies’ CEOs scrambled to make payroll after California’s banking regulators shut down SVB’s parent, the SVB Financial Group, to protect depositors when the value of its investment holdings plunged leading to a rush of withdrawal requests, starting on Wednesday.

According to reports, the crashed bank is now seeking a sale, as trading in its shares was halted after they plummeted 60 percent on Thursday.

Many startups, which parked their money with SVB, are now worried about paying their employees as their funds are locked up.

Venture capital investors also panicked about the fate of startups whose funds are stuck with SVB.

Depositors lined up on Friday at some SVB branches in California to get their cash out, fearing it could become inaccessible soon, but found the doors shut.

SVB played a critical role in nurturing many early-stage companies because of its reputation for taking bets on startups that would otherwise have had little chance of survival as larger banks found their funding far too risky. With its reputation, SVB had become the darling of several startups that grew big later.

The fallout of SVB’s sudden crash could unfold in the coming weeks and might presage a period of more cautious investing in technology startups, the media reported.

The sheer speed of the bank’s precipitous decline caught the startup community by surprise.

The SVB’s fate cast new doubts on the funding environment just as some bright spots were emerging, particularly for Artificial Intelligence startups, amid the grim fallout of 2022 in a post-Covid recovery phase that forced technology companies to trim a large number of jobs worldwide.

SVB’s sudden collapse caused ripples in India’s startup ecosystem as well.

Paytm’s founder Vijay Shekhar Sharma, for example, recalled how SVB became one of his first investors. “Long back, by selling to other private investors, SVB exited fully with handsome returns on their total investment of only USD 1.7 million. But they neither are a current shareholder (in Paytm) nor invested the amount given here.”