2023-03-11
SVB Under Scrutiny: What the Crisis Means for D-Street and the Start-up Ecosystem
Silicon Valley Bank Crisis
The Silicon Valley Bank (SVB) is a US-based
financial institution that primarily focuses on providing financial services to
start-ups and venture capital firms in the technology industry. Silicon Valley Bank is one of the oldest
and largest banks in the Valley and serves as a custodian for most of the local
deposits in the area. Their main focus is on funding technology companies and
providing various services to venture capital and private equity firms that
invest in technology and biotechnology. Additionally, they also offer private
banking services specifically designed for individuals with high net worth. However,
in 2020, SVB found itself in the midst of a crisis that sent shockwaves through
the tech industry and beyond.
The
Silicon Valley Bank (SVB) crisis was a scandal that erupted in 2020, when it
was revealed that a senior executive at the bank had misused company funds to
pay for expenses related to an extramarital affair with a subordinate employee.
The revelation led to an internal investigation, which uncovered further
evidence of financial impropriety and cover-up at the bank, ultimately
resulting in the resignation or termination of several high-level executives.
The
investigation revealed that the executive had also manipulated financial records
to cover up the misuse of company funds, and that several other employees at
the bank had been aware of the situation but had failed to report it. As a
result, several high-level executives at the bank were fired or resigned, and
the bank was forced to pay a large settlement to the employee who had been
involved in the situation. The SVB crisis has raised concerns about the
governance and oversight of financial institutions, particularly those that
focus on providing services to start-ups and venture capital firms in the
technology industry. It has also raised questions about the integrity and
culture of the tech industry more broadly.
The
fallout from the SVB crisis was significant. The bank's reputation, which had
been built on its close ties to the tech industry, was badly damaged, and many
of its clients began to question their relationship with the institution. The
crisis also highlighted the need for greater transparency and accountability in
the financial industry and raised questions about the effectiveness of
internal controls and oversight at other financial institutions. Some experts
have also suggested that the crisis highlights the need for more robust
regulation of financial institutions, particularly those that operate in highly
innovative and dynamic industries like technology.
The
financial group, which invests in many start-ups, stated in an investor
presentation that the proceeds from the share sale will be used to offset a
$1.8 billion loss on the sale of a $21 billion bond portfolio comprised
primarily of US Treasuries. According to Reuters, the portfolio was yielding an
average of 1.79%, which is far below the current 10-year Treasury yield of
around 3.9%. Moody's Investors Service has reportedly downgraded Silicon Valley
Bank's rating, citing rising interest rates, increased macroeconomic
uncertainty, venture capital investment activity, and high cash burn among
SVB's clients as creating difficult conditions for the firm.
In
response to the crisis the investors on D-Street, the SVB crisis may raise
concerns about the stability, trust and reputation of financial institutions,
particularly those that focus on the technology industry. However, it is
important to note that SVB is just one of many financial institutions that
operate in this space, and that there are many reputable and well-regarded
banks and financial services providers that support the growth and success of
start-ups and venture capital firms.
Many have befriended the situation expected identical to that of Lehman
Brothers and Enron Corporation, that manage generate a systemic risk to the
entire system. This is also because it has come at a time when interest rates
are high, and the US is on the brink of a recession. Had it fainted, it would
have provoked a major global financial crisis.
According
to the lead banker Udak Kotak in reaction to the SVB crisis, “When interest
rates move up 500 bps from zero in a year, an accident was waiting to happen
somewhere.”
“It (SVB) is in trouble not because of bad
lending practices, but because of a combination o strange way to invest short
term money, announcing a capital raise when another bank went bust, and then
telling people not to panic,” Shenoy tweeted.
Stock market of India witnessed major effects
on Dalal Street and saw banking stock downhill and heavy sell off on weak
global cues due to Silicon Valley Bank (SVB) crisis. The Silicon Valley Bank
news on bankruptcy led to huge beating as major three Wall Street indices —
S&P 500, Dow Jones and Nasdaq lost up to 2 per cent on Friday deals. This manages to proneness in investment
stocks on Dalal Street as Nifty Bank index crashed 771 points or about 1.87 per
insignificant values as most of the bigger investment stocks rectified
massively on the journey meeting.
According to the V K Vijayakumar, chief investment strategist at Geojit
Financial Services, “This is a US-specific issue and will not have an impact on
Indian banking stocks. But the sentiment impact can be negative.”
Vijayakumar believes that the sharp correction in banks should be used to buy the leading names in the private sector space.
Ultimately, the SVB crisis serves as a reminder of the importance of maintaining strong ethical standards and a culture of transparency and accountability and implementing robust internal controls and oversight in the financial industry. It also highlights the need for investors and other stakeholders to carefully assess the reputation and track record of financial institutions before doing business with them. For the tech industry, the crisis was a wake-up call about the risks associated with close relationships between financial institutions and start-ups, and the need for greater scrutiny and due diligence when selecting banking partners.