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Sat, Dec 14, 2024 | Jumada al-Aakhirah 12, 1446 | DXB
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Banking sector, startups should watch their steps after SVB, Signature Bank's failures
The region should also watch out for the connections between venture capital firms and prominent investors in Silicon Valley, as that relationship might get revisited sooner rather than later
- By
- Ehtesham Shahid/Viewpoint
Security guards and FDIC representatives outside a Silicon Valley Bank (SVB) branch for customers at SVB?s headquarters in Santa Clara, California. — AFP
It may not yet be the financial equivalent of Covid-19, but some of us might be catching a cold due to this rather wild sneeze across the Atlantic. Already dubbed the “biggest bank collapse since the 2008 financial crisis,” the Silicon Valley Bank (SVB) breathed its last without giving too many warning signals. The New York-based Signature Bank followed suit, becoming the third-largest failure in United States banking history.
Such has become the nature of our world, the air we breathe, and the money we earn and spend. There is always more to the ecosystem than what meets the eye. More often than not, we either wake up to a crisis not of our doing or struggle with an aftermath beyond our capacities.
On the face of it, why should the collapse of a commercial bank – headquartered in faraway California – bother us? There would probably be limited exposure to the bank and not too many account holders in this part of the world. However, we cannot afford to ignore that SVB was the 16th largest bank in the US before it turned turtle on March 10. Perhaps more importantly, it was the largest bank by deposits in Silicon Valley.
By the same logic, we might assert why we should bother about HSBC acquiring SVB’s British subsidiary for all of £1, especially when the Bank of England has already emphasised “the stability of the nation’s banking system.” Unfortunately, as they say, the devil always lies in the detail. In the cases of SVB and Signature, the details might just be unfolding, and the contagion is still being traced back.
Ehtesham Shahid is an editor at Emirates Policy Centre.
Considering SVB’s focus on tech start-ups over the years and the challenges tech firms – both big and small – have faced in recent months, this cannot be seen as an isolated development. Some attribute the disaster to Fed’s aggressive interest rate hikes in recent quarters, making financial conditions difficult for start-ups. As a notable player in that space, SVB had to bear the brunt as cash-strapped start-ups struggled for their next round of funding.
A sense of déjà vu with the infamous Lehman Brothers meltdown surfaces when it is discovered that banks suddenly struggling to survive were “active in real estate and popular with start-ups,” as with Signature. Sector-focused banking isn’t a particularly terrible thing. However, when greed takes over and regulatory mechanisms overlook blips on the radar, disaster usually is around the corner.
Signature Bank – the other financial institution in the eye of the storm – has its unique distinction. As of September 2022, almost a quarter of its deposits came from cryptocurrency. Even as some banks and financial institutions in the region get ready, even eager, to pick up the slack, they would be well-advised to watch their steps.
The region should also watch out for the connections between venture capital firms and prominent investors in Silicon Valley, as that relationship might get revisited sooner rather than later. That said, the SVB collapse is an opportunity that many big-ticket investors would be eying, and rightly so. A flurry of activities is also expected on the merger and acquisition front as investors look at distressed assets and refinance opportunities.
But should we expect a credit crunch in the technology industry? Greycroft Chairman Emeritus, Alan Patricof, told Bloomberg that things had gone way beyond technology space. “There are thousands of companies out there that have unused lines of credit who are expecting to use those and, in many cases, try to do traditional banking matrix around these loans,” he says.
Patricof says we shouldn’t be “asleep at the wheel” while understanding concerns about equity. However, with capital to invest, there will probably be many opportunities to invest in companies at perhaps more realistic valuations. “It’s probably a good time to be an investor,” he asserts.
Persistently high-interest rates, meant to tame inflation, have had consequences for the technology sector. With this new crisis to tackle, banks in the region would feel the pressure, markets would remain jittery, and regulators would perhaps take some long-term corrective measures.
Not satisfied with the answers, I put the subject to a ChatGPT test with amusing results. My simple question was, “Why the Silicon Valley Bank collapsed?” The somewhat miffed ChatGPT responded quickly: “I’m sorry, but Silicon Valley Bank has not collapsed. In fact, as of my knowledge cutoff date of September 2021, Silicon Valley Bank (SVB) was still operating and remained one of the leading banks serving the technology and innovation sectors.”
Here is the lesson learned. As shares plunge, political blame games happen, depositors scramble to rescue savings, and new valuations emerge, it is time to brush up our “knowledge cutoff date” at least by a few quarters.
Ehtesham Shahid is an editor at Emirates Policy Centre and researcher based in the UAE. Views expressed are his own and do not reflect the newspaper's policy.
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