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Sunday, March 26, 2023

Bankruptcy of the Silicon Valley Bank: should we wait for the start of a new financial crisis?

On Friday, regulators rushed to seize the assets of one of America’s largest banks in what was the biggest failure of a US financial institution since the height of the financial crisis nearly a year ago. 15 years old. Silicon Valley Bank, the nation’s 16th-largest bank, filed for bankruptcy after depositors rushed to withdraw cash this week amid concerns about its financial health. The bank primarily catered to tech workers and venture-backed companies, including some of the best-known brands in the industry. According to the bank’s website, nearly half of U.S. tech and healthcare companies that went public last year after receiving early funding from venture capitalists were clients of Silicon Valley Bank. . The bank has also bragged about its ties to top tech companies like Shopify, ZipRecruiter and top venture capital firm Andreesson Horowitz, according to The Associated Press. “This is an extinction-level event for startups,” said Harry Tan, CEO of Y Combinator, “the startup incubator” that launched Airbnb, DoorDash and Dropbox and referred hundreds. entrepreneurs in the bank.

Almost all deposits were uninsured

Startup founders are freaking out over access to money and employee compensation. Major players in Silicon Valley and the financial industry are publicly calling on the US federal government to push another bank to take over SVB’s assets and liabilities after the financial institution closes. The US Federal Deposit Insurance Corporation (FDIC) said it would cover up to $250,000 per depositor and could start paying those depositors as early as Monday.

The vast majority of SVB’s clients were companies with large bank deposits. More than 95% of the bank’s deposits were uninsured in December, according to regulators, CNBC reported. Many of those contributors are start-ups and many of their employees fear they won’t be able to get paid this month, which could trigger a massive wave of rejections and layoffs across the tech industry. Investors fear the setbacks could undermine confidence in the banking sector, especially mid-sized banks with deposits below $250 billion. These banks are not considered “too big to fail” and do not need to undergo the regular stress tests or other safeguards put in place since the 2008 financial crisis.

Venture capitalist and former CTO David Sachs called on the Feds to push another bank to buy SVB’s assets, tweeting (blocked in Russia): “Where’s Powell (Head of the US Federal Reserve)? Where is Yellen (US Treasury Secretary)? Stop this crisis NOW (in the author’s spelling – editor’s note). Announce that all depositors will be safe with a top 4 bank. Do it before Monday’s opening or contagion will occur and the crisis will spread.” Venture capitalist Mark Suster agreed, writing: “I suspect that’s something they’re working on. We will see. I really hope that otherwise it will be a difficult Monday.”

Britain awaits Chancellor of the Exchequer intervention

Fears of an impending massive banking crisis have reached Canada, India and China. In the UK, the SVB unit is due to be declared insolvent on Monday, having already ceased trading and no longer accepting new customers. On Saturday, executives of some 180 UK tech companies sent a letter calling on UK Chancellor Jeremy Hunt to intervene. “The loss of deposits could cripple the tech sector and set the system back 20 years,” the letter, obtained by Bloomberg, said. “Many businesses will be forced into liquidation overnight. This crisis will begin on Monday and so we urge you to prevent it now,” the UK startup founders and CEOs wrote in a letter to Hunt.
Hunt spoke to the Governor of the Bank of England about the situation on Saturday morning, and the Treasury’s economic secretary hosted a roundtable with affected companies later in the day, the department said. The agency has started asking startups about how much they have on deposit, their estimated cash flow and their access to banking services inside and outside the SVB, two sources from the agency said. agency.

SVB’s Collapse Could Destroy Startups Worldwide

But this is just the beginning, financial analysts have warned. SVB also had branches in China, Denmark, Germany, India, Israel and Sweden. The founders warn that a bank failure could wipe out startups around the world without government intervention. SVB’s joint venture in China, SPD Silicon Valley Bank Co., sought to reassure local customers that its operations were independent and stable.

SVB was known for providing banking services to early-stage startups around the world who would struggle to obtain banking services elsewhere before generating a stable cash flow. But the company itself has run into cash flow problems this year as seed funding has dried up and its own assets have been locked into long-term bonds.

Either way, analysts say, the executives of the Santa Clara-based SVB, the second-biggest bankrupt in US history after Washington Mutual in 2008, will have to take into account that they haven’t not protected from the risks of absorbing deposits from the instability of young technology companies and rising interest rates on assets.

Questions also remain over how SVB has handled its precarious position in recent months, and whether it erred in waiting and failing to block a $2.25 billion capital injection before publicly announcing losses. that have alarmed its customers, concludes Bloomberg. Investors and savers tried to withdraw $42 billion on Thursday, leaving the company with a negative cash balance of nearly $1 billion, regulators said.

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