The collapse of the Silicon Valley Bank was nearly a black swan event, sending shock waves some 8,000 miles away. The crisis set alarm bells ringing at a number of India’s start-ups with accounts at the bank that had millions of dollars stuck in them. And if not for a manoeuvre of the US government at the last minute, these businesses had almost embraced an unceremonious fate: mass layoffs, and in some cases, extinction.
In just 48 hours last week, as the Silicon Valley Bank (SVB) collapsed, hundreds of Indian start-ups nearly came undone. But the crisis seems averted, for now.
The epicentre
At the heart of the crisis lies the 40-year-old SVB, a bank with a legacy of dealing with high growth, but also high-risk businesses such as technology start-ups. The bank had a number of things going for it.
It offered an easy way for start-ups in India, especially in the SaaS (software as a service) sector, who have a number of US clients, to park their cash, as firms could set up their bank accounts without needing a United States Social Security Number or Income Tax Identification Number. Besides, as a founder explained, SVB had a very strong network of lawyers and accountants in the US who, for a fee, actively recommended the bank to high-growth start-ups.
Basically, it dealt with businesses that traditional banks typically stay away from given the perceived risk of failure and lent to start-ups when other sources of funding were hard to come by. “I’d say until a few years ago, it was only SVB; only today have start-ups started to get other funding options,” a founder has earlier told The Indian Express.
Given its perceived goodwill of having been there for these businesses when traditional banks were not, SVB had received a massive volume of deposits during the 2020-2021 tech boom and invested the proceeds into long-term Treasury bonds while interest rates were low. Like other banks, Silicon Valley Bank kept a small amount of the deposits on hand and invested the rest with the hope of earning a return.
That strategy was working until the US Federal Reserve began raising interest rates last year to cool inflation. At the same time, startup funding started to dry up, putting pressure on many of the bank’s clients — who then began to withdraw their money. To pay those requests, Silicon Valley Bank was forced to sell off some of its investments at a time when their value had declined. In the process, it lost nearly $2 billion.
That triggered mass withdrawal requests to the tune of $42 billion in one day from the bank as depositors moved to redeem their parked funds. But not everyone was successful.
The panic
The bank had failed. The US government shut it down and the Federal Deposit Insurance Corporation (FDIC) asked companies with accounts containing more than $250,000 to contact a toll-free number.
Last Friday (March 10) night, it was a long wait for several Indian start-up founders who had accounts at SVB and had a lot more than $250,000 parked there. That was the amount that was originally going to be insured by the FDIC. If a business had more money than that in its account – which hundreds of Indian start-ups did – it was unclear how much time it would take them to recover its deposits.
“It is 4 am now and we have been on hold at the toll-free number given by the FDIC for over half an hour. We have around $2 million in our SVB account and need that to create payroll,” a founder had told this paper early last weekend.
These start-ups used their SVB deposits to create payrolls, and not having access to that money would have meant that they would have had to fire a number of employees. And to compound the problem, the start-up ecosystem is already going through a funding winter, which has forced businesses to dip into their savings more and more. Panic had set in.
In a poll run on the WhatsApp group of Indian founders whose start-ups were incubated by the US-based technology start-up accelerator YCombinator (YC), a majority of the founders said they had more than $250,000 with SVB, with some having parked more than $1 million in their SVB accounts. SVB was also a preferred personal banker for several ultra-high-net-worth individuals in the technology space.
“I did not sleep for almost two days. I was constantly on calls with lawyers and accountants to figure out a way to save the company,” another founder, requesting anonymity said. His business had close to $3 million in its SVB account.
The relief
As the US government shut down the bank on Friday, it said that depositors would have access to their insured amount of $250,000 starting Monday (March 13). But that was always going to be an inconsequential amount. As of December 2022, SVB had $209 billion in total assets and about $175 billion in total deposits. But, 89 per cent of its $175 billion in deposits were uninsured.
The bank’s depositors had to be helped in order to prevent a contagion effect from severely impacting America’s banking system. But from the learnings of the 2008 financial crisis, and the public sentiment around bank failures, a bailout would not have been a popular move.
Then finally on Sunday (March 12) night, the US government came up with a plan. Instead of a total government bailout that would have required taxpayer money, the United States Federal Reserve announced that it would make available additional loans to eligible depository institutions to help assure that banks have the ability to meet the needs of all their depositors.
A new entity called the Bank Term Funding Program (BTFP) will be created and it will offer loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasuries, agency debt and mortgage-backed securities.
The Department of the Treasury will make available up to $25 billion from the Exchange Stabilisation 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.
Thanks to the manoeuvre, Indian start-ups said they could manage to withdraw their money.
A founder of a start-up backed by the US-based technology accelerator YCombinator (YC) said that the process to withdraw the money was smooth, although the wait times were long given the increased load on the bank’s servers as businesses in India and around the world started withdrawing their money en masse.
For now, a number of these firms are wiring their money from SVB to another US-based bank’s account given that SWIFT transfers – a secure and standardised method of sending or receiving money from banks anywhere in the world – do not work for SVB accounts.
“You can’t do a SWIFT wire from an SVB account. So we’re all just wiring to another US Bank account and then deciding what to do. I’ve heard of other companies succeeding with wires. And we’ve so far had a great experience switching to Brex since we already had their credit card,” the founder quoted above said.
