Editorial: Downfall of banking giant

The crisis is a wake-up call to further strengthen the approach to risk management and better prepare to respond to crises

Hyderabad: The collapse of Silicon Valley Bank (SVB), the largest American bank to fail since the 2008 financial crisis, has left billions of dollars belonging to businesses, investors and depositors stranded. Listed among the top 20 US commercial banks last year, the SVB was largely a tech and startup lender. As a result, the fate of several startups led by Indians hangs in balance now. Many Indian startups like Shaadi, CarWale, Sarva, Loylty Rewardz, TutorVista and Naaptol have raised funds from the beleaguered SVB Financial Group. According to TechCrunch, a US-based online publication that reports on startups, more than 60 YC (Y Combinator)-backed Indian startups have over $250,000 in accounts with SVB, and nearly two dozen have more than $1 million. YC is an American technology startup accelerator launched in March 2005. Several venture capitalist firms and Indian startups are unable to withdraw their investments from the bank because they do not have an alternative US bank account. Indian startups operating out of India are incorporated in the US to serve international markets. The meltdown of SVB, the first major bank failure in the social media age, has disrupted the global startup sector. In a desperate bid to affirm the stability and credibility of the American banking system, the Joe Biden administration has granted SVB customers access to their money. Soon after its collapse, Silvergate Capital Corporation and Signature Bank, which were major lenders to the crypto sector and tech startups, also followed suit. The developments bring back the memories of the collapse of the 158-year-old Lehman Brothers’ global investment bank in 2008, virtually bringing down the global financial system.

This year, as tech investment slowed and startups pulled cash out of the bank to pay their expenses, SVB needed to sell some of its bonds at a loss and seek fresh capital to meet its obligations. It is clear that lapses in regulation, coupled with an aggressive, risk-prone monetary policy aimed at taming inflation, brought the situation to such a pass. The writing was on the wall, but it was ignored by the regulatory authorities. The bank’s failure will have ripple effects throughout the tech sector in the short term, as companies that kept their money there struggle to get their deposits out and make payroll. The latest fiasco holds a bitter lesson for the US regulators and stakeholders. The key takeaway for India, which was rocked by the Punjab National Bank scam in 2018, is that no one can afford to ignore the warning signs. The regulatory system needs to be proactive rather than reactive to prevent a financial bloodbath and ensure the safety of people’s deposits. The crisis is a wake-up call to further strengthen the approach to risk management and better prepare to respond to crises in a well-coordinated and tested fashion.

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