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The collapse of Silicon Valley Bank

Globally, Silicon Valley Bank is touted as start-up friendly. It has been the banker of choice for venture capitalists and start-ups, including the Indian start-up ecosystem.

Silicon Valley Bank

The collapse of Silicon Valley Bank has sent shockwaves through the banking, startup, and tech community all across the world. The slump of SVB, which counts many startups and venture-capital firms as its clients, became the largest bank to fail since the 2008 financial crisis. Within 48 hours, America’s 16th largest bank was shut down.

What actually happened at SVB?

On Wednesday, SVB sold a large chunk of its securities, worth $21 billion at the time of sale, at a loss of about $1.8 billion after tax. Following this, the bank surprised its investors with an announcement that it is looking to raise $2.25 billion to shore up its balance sheet. This led to chaos among depositors. As the bank was running low on cash, it was trying to persuade clients not to pull their money.

In a single day, on March 9, customers tried to withdraw $42 billion, around a quarter of the bank’s total deposits. By the end of Thursday, SVB had a negative cash balance of $958 million, according to a California regulatory filing.

In less than two days, on Friday, the California Department of Financial Protection and Innovation shut down Silicon Valley Bank. The regulator appointed the Federal Deposit Insurance Corporation, a government agency,  as the receiver. The US regulators have taken control of nearly $175 billion in SVB’s customer deposits.

Accounts are insured by FDIC deposit insurance, but only up to deposits of $250,000. Reports reveal that about 90 per cent of deposits were uninsured as of December 2022.  That means depositors will have access to their insured deposits (capped at $250,000) by Monday. The agency has asked companies with accounts containing more than the capped amount to contact a toll-free number.

Now a new bank, the National Bank of Santa Clara, has been created by FDIC to hold the deposits and other assets of the failed one. The new entity will operate by Monday morning.

How Silicon Valley Bank collapse will impact India?

Globally, SVB is touted as start-up friendly bank and has been the banker of choice for venture capitalists and start-ups, including the Indian start-up ecosystem. The bank had investments in around 21 Indian startups, as per Tracxn data quoted by Livemint in its report. However, the exact investment amount is unclear. Bluestone, Carwale, and Loyalty Rewardz are among such startups.

As per reports, there are at least 40 Y Combinator-backed Indian startups having between $250,000 to $1 million each in deposits with SVB. 20 of them are said to have deposits of over $1 million each.  Early-stage startups can face immediate effects with even small disruptions to cash flow. Companies can have disruptions on the payroll.

Several Indian startups started looking to open accounts in US-based neo-banks like Mercury and Brex and transferring their money out of SVB. Some are taking the FDI route to transfer cash to India.

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