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Explainer: How Silicon Valley Bank’s failure came into limelight, which shook start-ups

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New Delhi : Silicon Valley Bank (SVB), one of America’s largest banks, closed last Friday. Its fall was so impressive that its shock waves were also seen in India about 8,000 miles away. The failure of Silicon Valley Bank rang alarm bells for many startup companies in India who had accounts in this bank and their millions of dollars were stuck in it. Hundreds of startup companies in India were on the verge of extinction because of the collapse of America’s largest bank in just 48 hours last week, but at the moment this crisis seems to be averted. Come, let us know how the failure of Silicon Valley Bank happened, which shook the startup companies of India?

epicenter of the banking crisis

According to a report in the English newspaper Indian Express, the center of the banking crisis that originated in America is the 40-year-old Silicon Valley Bank. It is a bank that has a legacy of high growth, but also has high risk businesses like Information Technology (IT) startups. The bank had many things for them too. Silicon Valley Bank introduced an easy way for start-ups in India. Especially in the software as a service sector (which has many US customers) offered a way to store their cash, as these companies can open their bank accounts in the US without needing a Social Security number or income tax identification number .

Bank has a large network of lawyers and accountants

The Indian Express quoted one of the startup’s founders as saying that the Silicon Valley bank had a very strong network of lawyers and accountants in the US who, for a fee, would actively recommend high-growth start-ups to the bank. Were. Primarily, it deals with businesses that traditional banks typically shy away from given the perceived risk of failure and lends to start-ups when other sources of funding are hard to come by. Until a few years back it was only Silicon Valley banks, today start-ups have started getting other funding options.

Bank deposits increased in 2020-2021

According to the report, looking at technology startup businesses at a time when traditional banks were not, Silicon Valley Bank received a large amount of deposits and long-term treasuries during the year 2020-2021 with the technology boom during the corona pandemic. Invested the proceeds in bonds while interest rates were low. Silicon Valley Bank, like many others, kept a small portion of deposits in hand in the hope of returns and invested the rest.

Crisis increased due to wrong strategy

The report said that this strategy of Silicon Valley Bank was working until the US Federal Reserve raised interest rates last year to reduce inflation. Around this time the bank began to soak up startup funding, squeezing out many customers. Then he started withdrawing his money. To top it all, Silicon Valley Bank was forced to sell some of its investments at a time when their value was low, in order to meet withdrawal requests from startup companies. In the process, he lost about $2 billion. That’s when there was an attempted mass withdrawal of $42 billion from banks in one day as depositors rushed to cash out their deposits, but not everyone was successful.

how the panic spread

The bank had failed. The US government shut it down and the Federal Deposit Insurance Corporation (FDIC) directed companies with accounts over $250,000 to contact a toll-free number. It was a long wait last Friday (March 10) night for several Indian start-up founders who had accounts with SVB and more than $250,000 in deposits. This was the amount originally intended to be insured by the FDIC. If a business had more money in its account (which hundreds of Indian start-ups have), it was not clear how long it would take them to recover their deposits.

How startups made payroll

These start-ups used their SVB deposits to make payroll and not having access to that money would have meant laying off many employees. The start-up ecosystem is already going through a financial drought, which has forced businesses to dip more and more into their savings. After the bank failed, there was panic among these startup companies. Indian startups were run on WhatsApp groups of founders whose start-ups were incubated by US-based technology start-up accelerator Y Combinator (YC). Most of the founders said they had more than $250,000 with Silicon Valley Bank.

How did depositors get relief

After the closure of Silicon Valley Bank last Friday, when there was an atmosphere of panic among startups companies around the world, President Joe Biden’s administration intervened in the US and assured the depositors of the bank to withdraw from Monday i.e. March 13. Gave. The Biden administration announced that depositors will have access to $250,000 of insurance coverage starting Monday (March 13). Explain that by December 2022, the total assets of Silicon Valley Bank were $ 209 billion and the total deposit amount was about $ 175 billion. The shocking thing is that out of the $175 billion deposits, about 89 per cent of the amount was not insured.

US government came up with the plan

Bank depositors were to be helped to prevent the US banking system from being seriously affected, but the lessons of the 2008 financial crisis and public sentiment around bank failures would have made a bailout not a popular move. So, finally on Sunday (March 12) night the US government came up with a plan. The US central bank, the Federal Reserve, announced that it would provide additional loans to eligible depository institutions, to help ensure that banks have Has the capacity to meet the needs of all its depositors.

what is the plan

For this, a new entity called Bank Term Funding Program (BTFP) will be created and it will offer loans of up to one year to banks, savings unions, credit unions and other eligible depository institutions. Those availing the facility will be asked to pledge high-quality collateral such as Treasuries, agency loans and mortgage-backed securities. The Treasury Department will provide up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. However, the Federal Reserve said it did not anticipate that it would be necessary to draw on these backstop funds.

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