Silicon Valley Bank (SVB) rose to the top of the banking industry in the United States within four decades. It was ranked the 20th best American bank in the most recent Forbes list.
But everything went south barely a month later. On March 10th, 2023, SVB shut down. Poor risk management, increased interest rates, and a downturn in the tech industry led to the second-biggest bank failures in US history.
The impressive growth and SVB’s focus on tech-oriented startups have attracted many investors and clients. Many were encouraged by the bank’s recent stability and deposited vast sums of money.
However, its risky investment strategies raised concerns, especially amid a looming financial crisis. Investors, businesses, and customers feared for their deposits’ safety and the banking system’s stability.
As a result, most of them withdrew their money within a few hours leading to the current troubles. Some industries affected by SVB’s collapse include technology, finance, and real estate.
This comprehensive analysis examines the impact of SVB’s collapse on seven distinct industries. It also emphasizes the need for financial institutions to prioritize stability and security in the wake of one of the largest bank collapses in US history.
SVB’s growth and collapse
Silicon Valley Banked joined the financial market in 1983. Over the years, it has been a pillar of support to various industries. The primary beneficiaries of the 40-year-old bank include online gambling, clean energy, biotechnology, and startups. It had also become the go-to bank for many fintech, e-commerce, and agriculture businesses.
In the past five years, SVB has maintained its status as the 16th largest bank in the United States. But in 2023, it went from making the list of the Best US banks to bankruptcy within a month.
So, what led to this massive fall that only lasted a few days?
- The 2020 success
The technology sector boomed during the 2020 pandemic. Two main contributing factors were low-interest rates and excessive money printing by the US Federal Reserve. Money was easy, and investors were willing to put their funds into tech enterprises.
As startups raised much money, they needed somewhere to store it, and that’s where SVB came in handy. The tech-based bank enjoyed one of its best growth curves during this period.
It became popular among founders and has built relationships with over 50% of venture firms in the US. SVB saw its deposits triple within a year, reaching around USD$189B in 2021.
- The risky long-term investment
Ironically, the influx in deposits marked the start of SVB’s decline. The banking titan decided to invest in long-term bonds, which are safer than stocks and which offer steady returns. Although this seemed an excellent idea, the management soon discovered its repercussions.
- Inflation rates
The inflation rates rose in late 2021, and the Federal Reserve’s late call didn’t help. When the Fed realized its mistake, it increased the interest rates to salvage the situation.
However, this didn’t allow the market time to adjust, affecting SVB’s investment environment. The newly-issued bonds became more attractive as they paid higher interest, leading to a shift in demand.
This change dropped the prices of the older bonds by a significant margin. Therefore, those holding them, including SVB, stared at huge unrealized losses.
At the same time, startups started withdrawing cash to run their operations, shrinking SVB’s deposits. As a result, the bank had to sell its “old bonds” at a loss worth USD$1.8B.
- The March 8th error
Given the losses, the logical choice was to raise capital, or so the management thought. It’s worth noting that Silvergate Bank had failed a few days earlier due to the same issue. So, the move worried SVB’s stakeholders, leading to the bank’s stocks falling by about 60% in 24 hours.
The depositors withdrew USD$42B by the end of March 9th. This high withdrawal rate crashed the bank’s system, triggering more panic. The Federal Deposit Insurance Corporation shut down SVB after its search for a solution failed.
How did SVB’s failure affect various industries? Have a look:
1. Online gambling: A surprising resilience
The online gambling industry relied heavily on SVB for financial services, but the bank’s collapse had an unexpected twist. MVB Financial, the West Virginia-based community bank that serves as the dominant third-party financial institution for internet casinos like Stake and online sportsbook operators, managed to avoid the chaos that befell SVB.
Additionally, many top gambling platforms are self-reliant, driven by cash reserves and profit yield, which provide them unique coverage in a time of uncertainty.
Stake, the world’s largest online casino, notorious for sponsoring the English Premier League and roulette-loving rapper Drake, was largely immune to the crisis and was offering to help out other startups in the online gaming space for resourcing.
The importance of regulatory oversight and security
MVB’s limited exposure to cryptocurrencies and its strong fundamentals have made it an unattractive target for short sellers. As more states legalize online betting, MVB’s gaming vertical is poised for deposit and fee growth, offering a stable alternative to financial institutions with riskier profiles.
2. Startups: A blow to innovation and growth
The collapse of Silicon Valley Bank has significantly impacted many startups in the US and other countries such as Israel. These early-stage companies are now left searching for alternative funding sources, which could slow innovation and hinder new ventures’ growth.
The industry must come together and support these startups during this challenging time, as they are critical to driving innovation and progress in our economy.
The role of venture capital and crowdfunding
Startups must now turn to venture capital firms, angel investors, and crowdfunding platforms to secure the necessary funding for their businesses. However, the competition for these resources may be fierce, as many other startups face similar challenges after SVB’s collapse.
3. Clean energy: A sector hindered by financial turmoil
The banking titan’s failure has impacted renewable energy projects, potentially slowing down green energy advancements and hindering efforts to combat climate change. With the bank providing financial support for numerous clean energy initiatives, the sudden withdrawal of funds has left many projects in limbo.
Finding alternative funding sources
To continue the fight against climate change, clean energy companies must now seek alternative funding sources. Government incentives, crowdfunding, and investment from environmentally conscious corporations may be viable options for these businesses to maintain momentum in a post-SVB world.
4. Biotechnology: A setback for life-changing research
The biotechnology sector, which relied on SVB for funding research and development projects, may now face delays in crucial research, affecting the development of new treatments and therapies for various diseases. The bank’s collapse could impede progress in gene editing, personalized medicine, and drug development.
The search for new funding partners
Biotechnology companies must now look for alternative funding sources to continue their research, including venture capital, partnerships with pharmaceutical companies, and government grants. This could be time-consuming, potentially slowing down the development of life-changing therapies.
5. Fintech: A test of resilience and adaptability
Fintech companies, which relied on SVB for banking services and funding, have been hit hard by the bank’s collapse. In the face of this financial crisis, fintech firms must reevaluate their business models and strategies to adapt to a rapidly changing landscape.
The emergence of new fintech players
While established fintech companies may struggle in the wake of SVB’s downfall, new players may rise to fill the void. Startups with innovative ideas and solid financial backing could seize the opportunity to reshape the fintech landscape in the post-SVB era.
6. E-commerce: Disruptions and opportunities
E-commerce companies, which relied on SVB for payment processing and other financial services, now face disruptions in their operations. These businesses must seek new partnerships with banks and financial institutions to continue providing seamless customer experience.
The rise of alternative payment solutions
The collapse of SVB may open the door for alternative payment solutions to gain traction in the e-commerce industry. Companies offering innovative payment technologies and secure financial services could capitalize on the situation and establish themselves as new leaders in the market.
7. Agriculture: Financial uncertainty in a vital sector
SVB’s collapse has affected the agricultural industry by causing uncertainty in the availability of loans and investments. Farmers and agribusinesses that relied on the bank for funding now face potential financial difficulties, which could impact food production and supply.
Seeking financial stability and support
The agricultural sector must now explore alternative financing options, including government subsidies, private investments, and partnerships with other financial institutions.
Ensuring financial stability and support for agriculture is crucial to maintaining food security and fostering sustainable development.
Financial health: A closer look at credit and bonds
A. Credit: The importance of trust and stability
The collapse of SVB has drawn attention to the importance of credit in maintaining financial health. With the bank’s failure, many businesses and individuals are left grappling with the impact on their credit lines.
This can have far-reaching consequences on their ability to secure loans, make investments, and maintain healthy cash flows. Maintaining a solid credit rating becomes even more critical for businesses and individuals in times of financial uncertainty.
Building and maintaining credit
Building and maintaining good credit is essential to ensuring financial stability for businesses and individuals. A strong credit score can help secure better loan interest rates, attract investors, and even improve relationships with suppliers and customers.
In light of the SVB collapse, it is more important than ever for businesses and individuals to monitor their credit scores, make timely payments, and manage their debts responsibly.
The role of credit rating agencies
Credit rating agencies play a crucial role in assessing the creditworthiness of businesses and individuals. These agencies help lenders and investors make informed decisions about extending credit or investing in bonds by providing credit ratings.
In the wake of SVB’s collapse, credit rating agencies may face increased scrutiny to ensure their assessments are accurate and reliable, helping to restore trust in the financial system.
B. Bonds: A test of confidence in the financial system
The bond market is another area that the collapse of SVB has impacted. Bonds, debt securities issued by corporations, governments, and other organizations, are a critical source of funding for many industries.
The stability and performance of the bond market are essential to maintaining investor confidence and ensuring that businesses and governments have access to the funds they need to grow and prosper.
Evaluating bond risk in a post-SVB world
Investors in the bond market must now reevaluate the risk associated with their bond holdings in light of SVB’s collapse. This may lead to heightened scrutiny of issuers’ creditworthiness as investors seek to minimize potential losses and safeguard their portfolios.
As a result, businesses and governments seeking to issue bonds may face increased challenges in securing the necessary funding, particularly if they are perceived as high-risk borrowers.
The role of government bonds in maintaining stability
Government bonds, often considered a relatively safe investment, can play a vital role in maintaining stability in the financial system during times of uncertainty.
Investing in government bonds can help support government spending and promote economic growth while protecting their investments from the potential risks associated with corporate bonds. They may also do so to preserve their financial health and support overall economic stability.
Conclusion
Silicon Valley Bank was one of the biggest US banks at the beginning of 2023. But today, its depositors, investors, and other stakeholders are still healing the financial wounds they endured in March.
The unexpected fall of SVB has caused disruptions and uncertainty across various industries. Startups were the most prominent victims, as more than half had a relationship with the bank. Agriculture, e-commerce, fintech, biotechnology, and clean energy also felt the heat.
As these sectors grapple with the fallout, the resilience of the crypto-gambling industry during this financial turmoil is commendable. This is evidence that reliable financial partners still exist and that sectors must adapt to new market conditions.
SVB’s situation also highlights the need for financial institutions to prioritize stability and security. They must always put their clients first in whatever decision they take. This way, they’ll gain the financial community’s confidence, which is vital in the banking industry.
This article was written in cooperation with Easygo