By Neeraj Bhatia-
Neeraj Bhatia, based in Silicon Valley is an accomplished accounting professional with 30 plus years of expertise in international and domestic tax planning, startups, and multinational entities. He is the co-president of Indo American Chamber of Commerce, SF Chapter.
The sudden shutdown of Silicon Valley Bank(SVB) on Friday, March 10, has shaken the entire Startup and Venture Capital community across the globe, and more particularly in Silicon Valley, California. It is being termed as the second largest US banking failure after the financial crisis of 2008 which brought down Washington Mutual Bank.
Silicon Valley bank, which was considered the backbone of the technology industry, had been at the forefront of working with founders, executives, and investors mainly of startups and venture-funded entities at various stages of financing and operations. It claimed to bank nearly half of all the US venture-backed startups with funds and corporations across the globe. For the last year, SVB served nearly 44% of the US venture-backed technology and healthcare companies that went public.
In 2022, SVB reported $212 billion in assets in its fourth quarter and was featured in the Forbes List of America’s Best Banks.
Now, all of a sudden most of these entities face total uncertainty to meet regular expenses, including running their payroll, despite having large amounts of liquid funds in their bank. This could have an even deeper impact on the startups which may also not be able to raise funds, besides not being able to pay their employees in the immediate future.
The developments in the two days before the regulators jumped in on March 10, to seize the deposits started with SVB announcing on Wednesday that it had sold securities worth $21 billion at a loss of 1.8 billion to raise liquidity and that it would also sell $2.25 billion in new shares to shore up its balance sheet. This triggered VC firms to instruct their portfolio companies to move funds to other institutions. The shares of the parent entity, SVB Financial nose-dived by nearly 60% on Thursday, and the trading was halted on Friday morning after falling 64% in pre-market trading.
As per filing with the California Department of Financial Protection and Innovation, despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. Despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve, and as a result, became incapable of paying its obligations as they came due. As a result, it was ordered that the Commissioner seize possession of the property and business of the Bank,
According to many analysts, Silicon Valley Bank’s decline stems partly from the Federal Reserve’s aggressive interest rate hikes over the past year, and indications of further increase till the spiraling inflation was controlled. As the interest rates have been raised, the value of low-yield treasuries that the bank acquired at near-zero rates, kept falling, leading to realized and unrealized losses to the bank.
FDIC insures deposits worth $250,000 only, as a result of which all the companies with millions and even billions of dollars of deposits with SVB have much of their cash balances uninsured. They have become unsecured creditors of the now insolvent Silicon Valley Bank and face uncertainty whether or not they will be able to recover the entire deposit balances.