THE DOWNFALL OF SILICON VALLEY BANK AND ITS IMPACT ON GLOBAL AND INDIAN FINANCIAL MARKETS

Kamalika Chakraborty, Sammata Sengupta (Corporate Lawyer, Advocate)  

Abstract

Silicon Valley Bank, which was established in 1983, provided funding for over half of US venture-backed technology and healthcare businesses. It is listed as "America's best bank" on Forbes' 2023 list and is the 16th-largest bank in the country. The Federal Reserve's impulsive interest rate increases during the previous year are partially to blame for Silicon Valley Bank's decline. Banks bought up large quantities of long-dated, ostensibly low-risk treasuries when US Fed rates were close to zero. However, as a result of the US Fed's constant rate hikes since 2022 to combat inflation, the value of such assets has decreased, leaving banks with a mountain of unrealized losses. This article discusses the history of Silicon Valley Bank (SVB) and the impact of its downfall on the capital market, globally, with a special emphasis on its potential influence on the Indian Economy. Regulatory failure has also been attributed another major reason behind its downfall, that should be analyzed thoroughly to prevent a global financial crisis of this magnitude in the future. This article also discusses the possibilities of the crisis causing yet another global recession similar to the one that had occurred in 2008.

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Keywords: Silicon Valley Bank, Technology, Global financial crisis, Indian economy, Capital market, Recession.

I. Introduction

“If there is one common theme to the vast range of the world’s financial crises, it is that excessive debt accumulation, whether by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom." — Carmen Reinhart

Silicon Valley Bank (SVB) has played a significant role in the capital market, particularly with respect to the technology and innovation industries. As a leading financial institution for these sectors, SVB has provided financing and financial solutions to innovative companies, venture capital firms, and their investors, thereby fuelling growth and innovation in the technology industry and creating a ripple effect on the broader capital market. SVB's expertise in venture capital financing has facilitated the growth of many early-stage technology companies which have gone on to become major players in their respective markets. By providing financing, SVB has enabled these companies to develop new products, expand their operations, and reach their full potential. However, SVB's impact on the capital market is not limited to the technology industry. The bank has also played a significant role in financing other innovative companies in sectors such as healthcare, energy, and consumer products. This has created new investment opportunities for investors, which has had a positive impact on the broader capital market.

Unfortunately, the American banking sector was devastated when three major companies failed in a span of three days in March 2023.[1] The first to suffer was California-based Silver Gate Capital, which said that company had entered voluntary liquidation after suffering losses of $1 billion (A$1.5 billion) in the previous quarter, which caused its shares to drop by 67%[2]. The country's 18th largest bank, Silicon Valley Bank, entered receivership less than 24 hours later.  The Federal Deposit Insurance Corporation had announced on the morning of 10th of March, 2023 that the California based Silicon Valley Bank had been shut down by the state's financial watchdog, making it the biggest bank to fail since the 2008 financial crisis.[3]

After announcing on March 8, 2023, that it had sold $21 billion in securities at a loss of $1.8 billion and intended to raise $2.25 billion in capital (consisting of $1.25 billion in common stock and $500 million in convertible preferred shares, with an additional agreement with General Atlantic to sell $500 million of common stock pending the closure of the aforementioned common stock offering), Silicon Valley Bank, a lender to technology startups, experienced a turbulent period. Following a drastic 60% plunge on March 9, attributed to swift share selling by investors, shares of the parent company, Silicon Valley Bank Finance, plummeted by 64% during pre-market trading on the morning of March 10.[4]

Greg Becker, the former CEO of Silicon Valley Bank, had also apologised for the lender’s ‘devastating’ failure during his congressional testimony.[5] He blamed rising interest rates and an excessive volume of withdrawal requests for the bank’s downfall. Becker stated in his prepared testimony that the bank had been actively addressing regulator concerns about risk management and taking action to remedy the problems. However, Silicon Valley Bank ultimately failed as a result of an unexpected and ‘unprecedented’ bank run. Some venture capital funds, notably Peter Thiel's Founders Fund, urged client companies to remove funds from Silicon Valley Bank due to worries about the bank's viability.[6]

It was the worst bank failure since the Great Recession and the biggest in US history. In the wake of Silicon Valley Bank’s bankruptcy, other banks suffered as investors and analysts looked for potential issues akin to those that Silicon Valley Bank had encountered. One such bank was First Republic Bank, whose shares dropped as much as 52% in early trade and has subsequently fallen much further.[7] Regulators shut down New York-based Signature Bank just two days after Silicon Valley Bank failed, making it the third-largest bank failure in American history (right behind Silicon Valley Bank).[8] Like Silicon Valley Bank, Signature Bank also sought to raise money or find a buyer but was not met with success.

Due to all these issues, concerns have been raised regarding the potential implications on Indian banks in light of the recently publicized issue at Silicon Valley Bank (SVB), a US-based financial institution, and its subsequent impact on multiple Indian start-ups. SVB has stakes in Bluestone, Carwale, InMobi, and Loyalty Rewardz through its parent company.[9] Thus, it cannot be ruled out that there will be a direct influence on the Indian start-up and/or new economy. Moreover, YCombinator, one of SVB's principal clients, has invested in over 19 start-ups in India.[10] Tracxn, a global SaaS-based market intelligence platform, recently published data showing that SVB has exposure to at least 21 startups in India. Thus, a second-order impact cannot be ruled out. The start-up industry was already feeling the effects of the financial winter, which might get worse. Indian banks are in a good position when it comes to the quality of deposits and the potential effects of mark-to-market losses on held-to-maturity books, according to a study by the global financial powerhouse Jefferies. From a basic standpoint, Indian banks seem to be somewhat protected from the Silicon Valley Bank debacle, and recent quarterly results have shown an improvement in their profitability. They have urged bargain hunters to purchase reputable banking equities this fall which could enable them to in case of change in trends. Rajeev Chandrasekhar, the Union Minister of State for Information and Technology, had engaged with over 450 Indian start-ups to gauge their impact and offer assistance.[11] The managing directors of public sector banks (PSBs) had also interacted with the Finance Minister, Nirmala Sitharaman to discuss their performance in light of the stress on the global financial system brought on by the failure of a few banks in the US and Credit Suisse in Europe[12].

II. SILICON VALLEY BANK: FROM STARTUP TO INNOVATION FINANCE LEADER

The financial institution, Silicon Valley Bank (SVB), which has its headquarters in the US, focuses on offering banking services, investment products, and other financial solutions to technology and innovation companies, venture capital firms, private equity firms, and their investors. Silicon Valley Bank, which was established in 1983, has offices in the world's most important technology hubs, including New York, San Francisco, London, and more. Its headquarters are in Santa Clara, California.

A group of business owners and venture capitalists established Silicon Valley Bank (SVB) in 1983 because they felt there was a need for a bank that could cater to the special requirements of the developing technology and innovation sector in California. The founders understood that conventional banks lacked the knowledge necessary to comprehend the risks and opportunities involved in financing innovative businesses and technology startups. Early on, Silicon Valley Bank concentrated on offering finance and banking services to venture capital firms and early-stage technology startups. The bank quickly established a name for itself as a leader in venture capital financing and the ecosystem of new technologies. Silicon Valley Bank increased its services and offers throughout the 1990s and 2000s to meet the changing needs of its clientele.[13] The bank established an investment banking section in 1998, and in 2004 it opened offices in London and Hong Kong to enter foreign markets.

SVB was one of the few banks that stayed steady and carried on lending to its customers during the financial crisis of 2008. Due to the bank’s concentration on the technology and innovation sector, it was shielded from the general economic downturn and came out of the crisis with a stronger position in the market.

In order to fulfil the changing needs of its customers, Silicon Valley Bank has recently continued to grow its services and capabilities and has increased its footprint in international markets by opening new offices in Canada, Israel, and China. The bank has also introduced new initiatives to support diversity, equity, and inclusion in the technology industry.

For venture capital firms, technology and innovation companies, and their investors, Silicon Valley Bank is a significant financial institution today. The bank is well-known for its creative financial solutions catered to the specific requirements of the technology industry, as well as for its competence in venture capital funding and global presence.

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III. A Comparison of the Pre- and Post-Pandemic Performance of Silicon Valley Bank

A. Pre-Pandemic Scenario

Silicon Valley Bank (SVB) was a prosperous financial organization, devoted to meeting the requirements of technology and innovation businesses before the COVID-19 epidemic. It was well known for offering cutting-edge financial solutions specifically suited to the demands of the technology sector, making it one of the top banks for startups and venture investors. Throughout the pandemic years, Silicon Valley Bank's services were highly sought after as the chosen bank for the technology industry.

Early in 2020, the Covid-19 market shock caused a swift shift in consumer spending patterns, ushering in a golden age for startups and established IT enterprises.[14]

Silicon Valley Bank was established in 1983 and has since developed into one of the biggest banks in the U.S.A., having locations in several of the main global technological hubs, such as the San Francisco Bay Area, New York City, Boston, London, and Shanghai. Many of the most prosperous technology and life sciences businesses in the world, as well as developing startups and venture capital organizations, were among the bank's clients.[15]

Silicon Valley Bank had previously achieved impressive financial outcomes, with consistently high levels of profitability and growth, before the COVID-19 pandemic. In order to better meet the changing demands of its customers, the bank had also been constantly releasing new goods and services. In general, Silicon Valley Bank was regarded as an important factor in the ecosystem of technology and innovation and as a useful partner by businesses and investors in the area.

B. Post-Pandemic Scenario

There was an abundance of deposits since many tech companies used Silicon Valley Bank to store the cash they used for payroll and other company needs. Like all banks, the bank invested a sizable amount of the deposits. When it made significant investments in long-term US government bonds, especially those backed by mortgages, the seeds of its collapse were planted. In all actuality, these were just as secure as houses. Yet, bonds and interest rates are inversely related; as rates rise, bond prices decline. As a result, Silicon Valley Bank's bond portfolio started to lose a lot of value when the Federal Reserve began raising rates quickly to fight inflation. In 2021, the Fed conducted a study of the expanding bank and discovered significant flaws in the way it was managing important risks.[16] Six citations were issued by the Federal Reserve Bank of San Francisco's supervisors, who were in charge of Silicon Valley Bank. These "matters requiring attention" and "matters requiring quick attention" alerts signaled that the company wasn't doing a good enough job of making sure that it would have enough accessible cash on hand in case of emergency. Yet, the bank did not address these weaknesses. Silicon Valley Bank was under full supervisory assessment by July 2022, receiving a more thorough examination, and was finally given governance and controls rating of inadequate[17]. It was subjected to a set of limitations that precluded it from acquiring more businesses. Senior executives at the company met with San Francisco Fed staff members last autumn to discuss their capacity to acquire adequate cash in an emergency and their exposure to losses as interest rates rose. Early in 2023, Silicon Valley Bank underwent what the Fed refers to as a "horizontal review," a test designed to determine the effectiveness of risk management. Further flaws were found during that inspection, but by that point, the bank's days were numbered. In March 2023, SVB had experienced a run and failed, sending shockwaves through the larger American banking system and ultimately prompting a wide government response intended to stop the spread of panic. In a hastily organized agreement put together by the Swiss government, Credit Suisse was taken over by UBS on Sunday. Credit Suisse had been swept up in the panic that followed Silicon Valley Bank's demise.

Significant concerns have emerged regarding the regulatory authorities' ability to promptly identify and address the underlying issues that led to the collapse of Silicon Valley Bank on March 10. In retrospect, many of the problems that led to its demise are clear; around 97 percent of its deposits, measured by value, were not covered by federal insurance, which increased the likelihood that consumers would leave the company at the first indication of difficulty.[18] A large portion of the bank's depositors came from the IT industry, which has recently faced difficulties as a result of rising interest rates that have hurt the company. Furthermore, Silicon Valley Bank owned a sizable amount of long-term debt that had lost market value as a result of the Fed's increase in interest rates to combat inflation. As a result, it suffered significant losses when it had to sell those securities to raise money to handle a surge in consumer withdrawals.

IV. REGULATORY ISSUES THAT MAY HAVE LED TO THE LARGEST BANK CRISIS IN THE UNITED STATES SINCE 2008

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1. Effective Risk Management helps financial institutions ensure smooth functioning, stability, and growth. It is not clear whether SVB's lack of a Chief Risk Officer (CRO) during much of last year contributed to any potential risk management or control problems. Listed companies and organizations are required to have a CRO who would be independent and will also have the specific responsibility for the risk management function as well as a thorough framework for risk management that spans the entire legal entity. According to recent reports, the San Francisco Fed did identify regulatory and risk management concerns and had alerted SVB about them more than a year ago, including how the bank managed its exposure to interest rate changes and whether it would have adequate liquidity in a crisis. (The bank's assets had doubled to more than $200 billion between 2017 and the time of the warnings.)

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2. Stablecoin USD Coin (USDC) lost its dollar peg and dropped to an all-time low late last week before recovering the majority of its losses when Circle, the company that created it, told investors that it would honour the peg despite its exposure to SVB, even though the SVB collapse was not caused by any actions directly related to crypto currencies. The $40 billion in USDC reserves held by Circle at Silicon Valley Bank totalled $3.3 billion, according to a tweet[19]. SVB is not the first crypto currency focused lender to go under in the past few weeks. The likes of Silver Gate Capital, Signature Bank, major lenders to the Crypto Industry also attained similar fate.[20]

3. Illegal Insider Trading can also be one of the regulatory concerns behind this insurmountable financial fiasco. The term "illegal insider trading" generally refers to the act of purchasing or disposing of a security while acting in violation of a fiduciary duty or other relationship of trust and confidence by using material, non-public knowledge about the security. Trading in stocks by the person who was "tipped," the person who "tipped" the information, and those who misappropriate it are all examples of insider trading offences. According to both the Wall Street Journal and the New York Times, the Justice Department and SEC are looking into the stock sales that Silicon Valley Bank managers made before the bank's failure. The investigations are allegedly still in the early stages. Both sources point out that when stock sales occur just before the release of information that could have a negative influence on a company's share price, it is customary to investigate premeditated stock selling strategies. The banks' CEO Greg Becker, who has been in that position for 12 years, and its CFO Daniel Beck, who joined the company nearly six years ago from Bank of the West, are both shown in securities filings to have sold shares two weeks prior to the bank's dramatic collapse. On February 27, Becker exercised options on 12,451 shares and then sold them, earning about $3 million. Beck sold shares for $575,000, or almost one-third of his total interests in the firm, on the same day[21].

4. The bank's executive salary may also be the target of regulatory action. Silicon Valley Bank's executive compensation increased dramatically as a result of the bank's decision to adopt a strategy to increase profitability by acquiring riskier assets that are sensitive to rising interest rates. Due to sizable multiyear bonuses tied to the bank's return on equity (RoE), a crucial indicator of profitability that increased significantly between 2017 and 2021, CEO Greg Becker and CFO Daniel Beck saw an increase in salary. In 2021, the bank received a massive influx of deposits as a result of a pandemic-driven surge in fresh finance for its clients, the majority of which were Silicon Valley-based technological companies. The bank then put together a sizable $125 billion securities portfolio, the majority of which were long-dated mortgage bonds. By the conclusion of that year, the RoE was 17% and the average length was four years[22]. As SVB's clients struggled with the challenging economic climate towards the end of 2022, they began withdrawing deposits from the bank. Due to this, the lender was compelled to sell a portion of its long-term bonds earlier this month for a $1.8 billion loss. The bank had a run after a botched attempt to acquire capital to close the hole in its balance sheet, which compelled the government to intervene and seize the institution. Only two of the issues to be addressed are how common the claw backs will be and how far back in time. The specifics of what was understood and when, will determine the solutions.

5.  Environmental, social, and governance (ESG) policy critics have used media channels to cast doubt on the bank's ESG initiatives and if it’s social and environmental obligations were more significant than conventional financial risk management. SVB seems to check off several boxes for ESG investors. The bank was a significant lender to renewable energy companies and a favourite of ESG managers searching for companies with small carbon footprints. The engagement tactics of ESG fund managers, in which they meet with portfolio companies to discuss the risks that need to be addressed, are frequently praised. Yet, given SVB's "A" grade from MSCI Inc. and a "Controversy Level" of 0 from Sustainalytics, it's possible that fund managers did not believe the bank needed to change right away. The fact that less attention was paid to governance risks by the fund managers is apparent now.

VI. IMPACT OF THE SILICON VALLEY BANK COLLAPSE ON THE GLOBAL ECONOMY

The collapse of Silicon Valley Bank (SVB), one of the biggest and most recognizable banks in the world, has had a significant impact on the international economy. SVB was renowned for assisting cutting-edge technology firms, and its closing down has had an impact on global banking and financial institutions in addition to the technology industry. This section discusses the wide-ranging effects of SVB's failure on enterprises and countries around the world, emphasizing its effects on the technology sector, the United States' standing abroad, financial markets, and regulatory initiatives.

• SVB, renowned as one of the world's largest and most prosperous banks, played a pivotal role in providing essential financial support to a multitude of highly innovative and fast-growing technology companies.

• The downfall of SVB has significantly disrupted the broader IT industry, which heavily relied on the bank's financing services. Consequently, these technology businesses now face considerable challenges in securing the necessary funds to sustain their development and expansion.

• In addition to its impact on the technology sector, the collapse of SVB has reverberated throughout the global economy. As a major player in the banking sector, SVB maintained extensive connections with banks and financial organizations worldwide, leading to geopolitical ramifications.

• The decline in SVB's credibility has raised doubts about the United States' ability to maintain its global leadership in capital markets and technology. The waning confidence in SVB questions the nation's capacity to sustain its worldwide dominance.

• Notably, the consequences of SVB's fall have not been limited to the United States. Many of the world's leading technological companies, with their headquarters located outside the US, relied on SVB for critical financial services. These companies now face significantly greater obstacles in securing finance and accessing essential financial resources.

• The collapse of SVB has also had repercussions on the banking sector and securities market. For instance, Credit Suisse, directly impacted by the shock wave, experienced substantial losses due to its own missteps.[23]

• The annual report of SVB has unveiled that its failure was preceded by notable deficiencies in its financial information control systems. Following the announcement made by its largest shareholder on March 15, 2023, indicating an inability to offer additional financial support, there was a subsequent 24% decline in Credit Suisse's share price. This failure, combined with the collapse of Greensill Capital and the investment firm Archegos, triggered a global decline in stock markets, with banking equities particularly affected. Consequently, bond yields for the US and the Eurozone declined, while gold prices continued to rise as investors sought safe haven assets.[24]

• Furthermore, in a bid to protect the bank's depositors after the failure of its American parent, HSBC acquired Silicon Valley Bank's British affiliate for just over $1. The acquisition was a result of regulatory efforts to prevent bankruptcy, an action that the Bank of England had threatened in the absence of a buyer.

VII. EXPLORING THE RIPPLE EFFECTS OF SILICON VALLEY BANK’S DOWNFALL ON THE INDIAN FINANCIAL MARKETS

In recent years, the tech sector has emerged as a significant growth and innovation engine for the Indian economy. The nation is home to a large number of tech startups and businesses that depend on funding and investment from organizations like Silicon Valley Bank. A major player in the IT financing industry going out of business might have a big impact on the Indian tech sector as well as the overall economy. Along with these economic ramifications, the collapse of Silicon Valley Bank also poses significant concerns regarding the function of financial institutions in promoting innovation and growth. The need for specialized lenders and investors, like Silicon Valley Bank, to supply the money required to support innovation and disruption in the tech sector has grown as a result of its expansion.

The demise of the bank, according to industry analysts, is likely to have an effect on Indian start-ups because it has created a great deal of uncertainty in the sector. According to The Economic Times, start-up businesses supported by Silicon Valley accelerator Y Combinator (YC) are having difficulties and with a 6% stake in total assets, 4% in loans, and 5% in deposits, foreign banks are relatively less prevalent in India[25]. With a 50% holding, they are increasingly involved in the derivative markets (forex and interest rates). The majority of them are present as branches of the main bank, with only a small number being present as a wholly-owned subsidiary. According to asset size, the top five foreign banks in India are HSBC, Citibank (which has since sold its consumer business to Axis), Standard Chartered, Deutsche Bank, and JP Morgan[26]. Rate increases are risking financial instability while the clock is ticking on an oncoming recession.

India is also experiencing a money crunch due to its slow M2 expansion (M2 is a measure of money supply in the market which includes the sum of all currency in circulation in addition to short-term time deposits in banks and money market funds) (despite an increase in credit), dry liquidity surplus, rising real rates, and flattening curve. This signals a decline in domestic-demand.

VIII. CRITICAL ANALYSIS OF THE REGULATORY DILEMMA OUTLINING THE GLOBAL FINANCIAL CRISIS

Could the fate of Silicon Valley Bank be predicted by the Regulators in an earlier stage and if so, then to what extent?

A variety of distinct components are included in the supervisory processes of bank regulation. Sometimes they involve making sure that certain procedures have been followed by mindful checking. They occasionally question risk management procedures. Examiners and bankers will consult one another when something goes wrong to ensure that the questions are fully understood. When they are, an examination report is published, and the bank responds to it.

The examiner—in this case, an employee of a Federal Reserve Bank—will collaborate with a team to escalate the problem when an examination report identifies a failure to follow adequate procedure or when the risk has been escalated without a reasonable ground.

A Matter Requiring Attention (M.R.A.) is the result of that escalation, and the board of the entity being investigated receives the M.R.A. The presence of M.R.As in virtually every monitored bank is common. It typically takes the consent of a supervisor of supervisors, often known as a chief examiner, to elevate an M.R.A. to a Matter Needing Immediate Attention (M.R.I.A.). The chief examiner is not going to act alone and is responsible for a number of different banks. The chief examiner often makes the decision after consulting with other members of the Federal Reserve Bank and the Board of Governors in Washington, D.C., but this is not explicitly stated in any form of public record. There are a select number of the numerous M.R.As that are particularly important and require "rapid" resolution. An M.R.I.A., however, is not just a file that sits on a desk; it serves as the foundation for further enforcement action. Failure to settle M.R.A.s or M.R.I.As can quickly lead to more extreme measures, such as a directive that a bank not accept any new clients, sell any assets, or even close down. Regulatory authorities had access to every M.R.A. and M.R.I.A.

These were written by supervisors, and it can be very certainly inferred that the deterioration of risk management on the asset side and the rise of speculative deposits on the liability side had to be discussed.

Occasionally M.R.I.A.s are exceptionally egregious examples of risk mismanagement or process breakdowns. The bank hasn't taken any action against them, therefore they occasionally escalate from M.R.A.s. can be assumed that both of those things are what the M.R.I.A.s were, although there is no confirmation. Additionally, The Dodd-Frank Wall Street Reform and Consumer Protection Act is legislation that was passed by the U.S. Congress in response to financial industry behavior that led to the financial crisis of 2007–2008[27]. It sought to make the U.S. financial system safer for consumers and taxpayers. And according to the Title II of the Act the banks were required to produce a "living will" that outlined how they wanted to pass away in the event of a catastrophe.

However, unlike in this case, the Federal Deposit Insurance Corporation (FDIC) did not guarantee the uninsured liabilities of its depositors in the orderly death. In this sense, a living will would have listed additional types of loss-absorbing capital, other types of liquidity, had it been submitted—the legislative change in 2018 eliminated that necessity. Dodd-Frank also refers to several modifications to the financial system. The major change was that all banks with assets over $50 billion were now subject to a supervisory regime that was far more aggressive, open-ended, and discretionary. Enhanced prudential oversight is what this is called[28]. Stress testing is a part of it.

Prior to the 2018 rollback, annual stress testing would have been conducted that would have detected the concentration of risks. The most bizarre aspect of this tale is how Silicon Valley Bank mismanaged its risk while using the safest, most basic assets imaginable. Due to the way the capital regime values certain assets, if a stress-testing system had been in place, they might have passed. That is a criticism of the stress-testing system; Silicon Valley Bank is not to blame. Yet, that mitigates the argument that, had it still been applicable, the stress test would have saved Silicon Valley Bank.

IX. Will the Silicon Valley Bank Crisis Lead to a Repeat of the 2008 Recession?

The collapse of SVB has been linked by wealthy hedge fund manager Bill Ackman to that of "Bear Stearns," the first bank to fail at the beginning of the global financial crisis in 2007–2008. The risk of collapse and deposit losses here is that the following, least well-capitalized bank suffers a run and fails, and the dominoes continue to fall, was commented by Ackman on Twitter.

Analysts disagree, however, and believe that the SVB collapse is currently more company-specific. The government of Joe Biden has additionally stated that measures put in place during the 2008 financial crisis will secure the nation's economy notwithstanding Silicon Valley Bank's closure.

US Treasury Secretary Janet Yellen has stated that she has complete faith in banking regulators to respond appropriately and has underlined that the financial system is still robust and that regulators have powerful instruments to handle this kind of occurrence.[29] Vivek Ramaswamy, an Indian-American running for president of the United States in 2024, connected the "primary cause" of the 2008 financial crisis to SVB's usage of ESG criteria in loan pricing. Ramaswamy stated in a statement on video,

"The use of social variables in lending decisions was a major contributor to the financial crisis of 2008 (back then, fostering home ownership). Did Silicon Valley Bank use ESG variables to price its loans? History repeats itself when we don't learn from our mistakes. See what crawls out when you turn that log over".

The U.S. economy will eventually slow down, probably a bit sooner than expected after these events, but it could still take a while,” says Vincent Vinatier, a portfolio manager at AXA Investment Managers, in a cautious forecast.

An economist from a major American investment firm says, "Nobody knows, nor can they know yet," adding that deposits have been moved from certain lenders to others and that it is unclear how severe the credit limitation will be. What is undeniably true is that there are now more negative risks, and Goldman Sachs has elevated the likelihood of a recession to 35%.

US Financial commentator Robert Armstrong wrote in the Financial Times that the risk of contagion within the banking sector appears to be modest, but every cycle of rate increases by the central bank ends with a stage where the financial system starts to falter. These failures, whether little or significant, undermine consumer and investor confidence and raise the likelihood of recessions. Although SVB's failure doesn't predict another 2008, it does signal the start of the breaking phase.

Also, the Federal Reserve is likely to tighten oversight and regulation of significant regional banks, which will indirectly limit credit. But, despite the fact that the US has been warning of an impending recession for almost a year, it hasn't yet materialized. The job market has proven to be extremely resilient. Even while this episode of volatility may make it necessary to hike rates a bit less, it does not significantly alter the economic picture. The Fed seeks to cool demand to battle inflation (at least for now)[30].

Something similar is happening in the rest of the world. Obviously, recent events are not good news and the risks have increased, but it is too soon to gauge a real impact on the global economy.

X. ANALYZING THE COLLAPSE OF THE SILICON VALLEY BANK: LESSONS LEARNED AND FUTURE IMPLICATIONS FOR THE INDIAN CAPITAL MARKET

A. Startups

Startups in India that relied on Silicon Valley Bank (SVB) for funding and support may be impacted in some way by the bank's demise. SVB has played a significant role in the Indian startup ecosystem, especially in the fields of technology and innovation, and has supported and funded a number of outstanding firms.

It might be more difficult for these businesses to obtain the money they require to expand and scale if SVB's financial difficulties cause it to reduce its lending to or other services provided to Indian entrepreneurs. This could limit the ecosystem's general expansion, especially in regions where SVB has been particularly active. It's crucial to keep in mind, though, that Indian businesses have access to a wide range of other funding and assistance options, including those offered by other banks and financial institutions, venture capital firms, and angel investors. SVB has played a significant role in the ecosystem, but there are many other participants as well. As a result, the ecosystem as a whole is likely to be resilient despite any difficulties. The enormous and constantly developing domestic market, the nation's highly qualified population, and the expanding availability of capital and support for startups are all factors that will likely cause the Indian startup ecosystem to continue to grow and evolve over the long term. While SVB's demise may present some immediate difficulties, the Indian startup ecosystem's long-term prospects are still promising.

The exposed Indian Startups in which SVB has invested, according to Tracxn data, are as follows[31]:

               Company                                      Total funding in USD

1. Divitas Networks                                   4 million

2. Shaadi                                                    8 million

3. CarWale                                                 9 million

4. iCafe Manager                                      10 million

5. GeodesicTechniques                            11 million

6. Sarva                                                      12 million

7. Asklaila                                                   12 million

8. Anantara Solutions                               13 million

9. Games2win Media                               13 million

10. Loylty Rewardz                                      28 million

11. Genesis Colors                                      74 million

12. iYogi                                                       85 million

13. TutorVista                                              102 million

14. BlueStone                                              111 million

15. Naaptol                                                  133 million

16. Bharat Financial Inclusion                    144 million

17. lnMobi                                                    265 million

18. Paytm Mall                                             808 million

19. One97 Communications                      2787 million

B. IT Sector

The Indian IT sector has seen a substantial contribution from Silicon Valley Bank (SVB), which has financed and supported a number of the nation's most promising firms. There may be less funding and assistance available for Indian entrepreneurs, particularly those in the technology and innovation industries, if SVB were to fail as a result of a massive run by depositors. As a result, fewer entrepreneurs may be able to obtain the finance they require to expand and scale, which could hinder the growth of the Indian tech market as a whole. It might also cause a change in the mindset of investors, making them more cautious and risk-averse in their choices of investments. It is crucial to remember that there are a variety of other banks, financial institutions, venture capital firms, and angel investors that Indian businesses can turn to for funding and help. The collapse of SVB may have an effect on the Indian tech economy, but the ecosystem as a whole is likely to be durable despite any difficulties[32]. The Indian tech market is also very diverse, with a wide spectrum of businesses active in various industries and verticals. The availability of capital and support from players like SVB has contributed to the rise of the Indian tech market, but it has also been influenced by other factors such as technological advancement, global economic trends, and national laws and initiatives. The severity and duration of the event, as well as the reactions of other actors in the ecosystem, are likely to influence how SVB's collapse affects the Indian tech sector in the long run. The enormous and quickly growing domestic market, the nation's highly qualified population, and the expanding availability of financing and assistance for startups all contribute to the overall good prognosis for the Indian IT business, despite some potential short-term obstacles.

C. Banking System

The failure of Silicon Valley Bank (SVB), a US-based bank with operations in India, may undermine public trust in the banking system as a whole, especially if the reasons for SVB's failure were perceived to be systemic problems impacting the whole banking industry. This might cause deposits in other banks to be withdrawn, especially those that are thought to be in danger of failing. This might therefore cause a liquidity crisis in the financial sector, which would make it more difficult for banks to extend credit and possibly result in a credit crunch for both businesses and individuals. A significant international bank failure like SVB will also have broader effects on the world financial system, possibly triggering a global economic slowdown and a decline in trade and investment. It's crucial to remember, though, that the Indian banking industry is generally well-governed and well-capitalized. The Reserve Bank of India (RBI) has improved risk management procedures, raised capital requirements, and increased transparency and accountability in recent years in order to strengthen the banking system.

The Securities and Exchange Board of India (SEBI), which is owned by the Indian government's Ministry of Finance, oversees the country's securities and commodity markets. It was founded on 12 April 1988 as an executive body, and on 30 January 1992, the SEBI Act, 1992, granted it legislative authority. The task of SEBI is to guarantee the smooth operation of the Indian securities market. By creating a secure environment for securities, it serves to safeguard the interests of investors and traders on the Indian stock market and to encourage the growth and regulation of the equities market. Also, as was already said, one of the main goals of SEBI was to stop fraud in the Indian capital market.

XI. Conclusion

In conclusion, the SVB incident exposed many founders' lack of crisis management readiness and served as a huge wake-up call. The lessons taught went beyond practical matters like banking and cash management, emphasizing the value of being composed and communicating effectively with stakeholders in trying circumstances. The importance of making decisions quickly in other urgent situations, like security breaches or PR incidents, was highlighted by the requirement for a prompt board resolution to handle payroll issues during the SVB crisis. Clear roles for communication and process leadership are required in response to the "code red" crises that may occur frequently in the early phases of a business. After every crisis, retrospectives should be used to improve the crisis management strategy moving forward. Despite the fact that it is hard to foresee every circumstance, founders should have a broad plan in place to direct their response. Founders may better navigate upcoming crises and maintain the durability of their companies by thinking back on the past and making improvements. Not just in the US, but across the globe, the failure of the Silicon Valley Bank (SVB) has had a significant impact on enterprises and governments. One of the largest and most successful banks in the world, SVB has played a key role in assisting many of the most innovative and quickly growing technical enterprises with their financial needs. The fall of SVB has had a significant geopolitical impact and with the collapse of this bank, there is now less confidence in America's capacity to maintain its position as the world leader in technology and finance. This drop in confidence does raise questions about the United States' ability to continue its global supremacy.

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[2]Mackenzie Sigalos, Crypto-Focused Bank Silvergate is shutting operations and liquidating after market meltdown, CNBC (Mar. 21, 2023), https://www.cnbc.com/2023/03/08/silvergate-shutting-down-operations-and-liquidating-bank.html.

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[4] Jesse Pound, Silicon Valley Bank fails to find buyer as run on bank outpaced sale process, CNBC (Mar. 10, 2023), https://www.cnbc.com/2023/03/10/silicon-valley-bank-financial-in-talks-to-sell-itself-after-attempts-to-raise-capital-have-failed-sources-say.html.

[5] Former Silicon Valley Bank CEO apologizes for bank's collapse, says rate hikes, withdrawals sank firm, THE ECONOMIC TIMES, (Mar. 16, 2023), https://economictimes.indiatimes.com/news/international/business/former-silicon-valley-bank-ceo-apologizes-for-banks-collapse-says-rate-hikes-withdrawals-sank-firm/articleshow/100265199.cms?from=mdr.

[6] Ryan Hogg, Peter Thiel's Founders Fund got its cash out of Silicon Valley Bank before it was shut down, report says, BUSINESS INSIDER INDIA (Mar. 11, 2023), https://www.businessinsider.in/tech/news/peter-thiels-founders-fund-got-its-cash-out-of-silicon-valley-bank-before-it-was-shut-down-report-says/articleshow/98567263.cms#:~:text=down%2C%20report%20says-,Peter%20Thiel's%20Founders%20Fund%20got%20its%20cash%20out%20of%20Silicon,was%20shut%20down%2C%20report%20says&text=Peter%20Thiel's%20Founders%20Fund%20withdrew,with%20transfers%2C%20per%20the%20report.

[7] Ariel Zilber, First Republic Bank falls nearly 70%, trading halted after collapse of SVB, Signature, NEW YORK POST (Mar. 13, 2023), https://nypost.com/2023/03/13/first-republic-bank-falls-over-60-after-svb-signature-collapse/.

[8] Ibid.

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[10]  Bhavya Dilipkumar et. al., YCombinator-backed Indian start-ups are collateral damage in Silicon Valley Bank collapse, MONEY CONTROL (Mar. 11, 2023), https://www.moneycontrol.com/news/business/startup/ycombinator-backed-indian-start-ups-are-collateral-damage-in-silicon-valley-bank-collapse-10233391.html.

[11] MoS Rajeev Chandrasekhar interacts with over 450 Indian Startups on the recent collapse of Silicon Valley Bank (SVB), Ministry of Electronics & Information Technology (Mar. 14, 2023) https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1906913 (last visited Mar 30, 2023).

[12] Rahul Sunilkumar Singh, FM Sitharaman to meet CEOS of PSU banks amid ongoing Global Bank Crisis: Report, HINDUSTAN TIMES (Mar. 23, 2023), https://www.google.com/amp/s/www.hindustantimes.com/business/fm-sitharaman-to-meet-ceos-of-psu-banks-amid-ongoing-global-bank-crisis-report-101679551951759-amp.html.

[13]Maureen Farrell, Inside the collapse of Silicon Valley Bank, THE NEW YORK TIMES (Mar. 14, 2023), https://www.nytimes.com/2023/03/14/business/silicon-valley-bank-gregory-becker.html.

[14]International trade during the COVID-19 pandemic: Big shifts and uncertainty, OECD (Mar. 10, 2022), https://www.oecd.org/coronavirus/policy-responses/international-trade-during-the-covid-19-pandemic-big-shifts-and-uncertainty-d1131663.

[15]Jonathan Barrett, Silicon Valley Bank: Why did it collapse and is this the start of a banking crisis?, THE GUARDIAN (Mar. 13, 2023), https://www.theguardian.com/business/2023/mar/13/silicon-valley-bank-why-did-it-collapse-and-is-this-the-start-of-a-banking-crisis.

[16]Kelsey Coyle, Laura Kim, Shaun O’Brien, 2021 findings from the Diary of Consumer Payment Choice, FEDERAL RESERVE BANK OF SAN FRANCISCO (May 5, 2021), https://www.frbsf.org/cash/publications/fed-notes/2021/may/2021-findings-from-the-diary-of-consumer-payment-choice.

[17]Before collapse of Silicon Valley Bank, the fed spotted big problems, DNYUZ (Mar. 19, 2023), https://dnyuz.com/2023/03/19/before-collapse-of-silicon-valley-bank-the-fed-spotted-big-problems.

[18] Jeanna Smialek, Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems, NEW YORK TIMES (Mar. 19, 2023), https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html.

[19] Watch Live, Crypto firm Circle reveals $3.3 billion exposure to Silicon Valley Bank, (Mar. 11, 2023), https://www.cnbc.com/2023/03/11/crypto-firm-circle-reveals-3point3-bln-exposure-to-silicon-valley-bank.html

[20] Jesse Pound, Silicon Valley Bank is shut down by regulators in biggest bank failure since global financial crisis, CNBC (Mar. 10, 2023, 11:46 AM), https://www.cnbc.com/amp/2023/03/10/silicon-valley-bank-is-shut-down-by-regulators-fdic-to-protect-insured-deposits.html.

[21]Alex Padalka, Regulators probe SVB Execs' stock sales prior to Bank's collapse: Reports, FINANCIAL ADVISOR IQ (Mar. 15, 2023),https://www.financialadvisoriq.com/c/3979364/511684/regulators_probe_execs_stock_sales_prior_bank_collapse_reports

[22]Bloomberg, Silicon Valley Bank exposes ‘lazy’ ESG funds as hundreds bet on doomed bank, THE FINANCIAL EXPRESS (Mar. 16, 2023, 17:26), https://www.financialexpress.com/investing-abroad/featured-stories/silicon-valley-bank-exposes-lazy-esg-funds-as-hundreds-bet-on-doomed-bank/3012099.

[23] Damien Chmiel, Credit Suisse Shares Hit All-Time Low Following Silicon Valley Bank Collapse, FINANCE MAGNATES (Mar. 13, 2023), https://www.financemagnates.com/institutional-forex/credit-suisse-shares-hit-all-time-low-following-silicon-valley-bank-collapse/.

[24] Isabel Togoh, Credit Suisse, Burned By Archegos And Greensill Scandals, Shifts Focus To Wealth Management In Overhaul, FORBES (Nov. 4, 2021), https://www.forbes.com/sites/isabeltogoh/2021/11/04/credit-suisse-burned-by-archegos-and-greensill-scandals-shifts-focus-to-wealth-management-in-overhaul/

[25]Kyle Peterdy, Debt to Asset Ratio, (Mar. 30, 2020), https://corporatefinanceinstitute.com/resources/commercial-lending/debt-to-asset-ratio.

[26]Manya Rathore, India: foreign bank assets 2022, STATISTA (Oct. 17, 2022), https://www.statista.com/statistics/1006380/foreign-banks-assets-in-india/.

[27]Adam Hayes, Dodd-Frank Act: What It Does, Major Components, Criticisms, (Jul. 15, 1955), https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp.

[28]Everything You Need To Know About the $50 Billion Threshold, BETTER MARKETS | TRANSPARENCY. ACCOUNTABILITY. OVE (Feb. 28, 2018), https://bettermarkets.org/analysis/everything-you-need-know-about-50-billion-threshold/.

[29] US Treasury's Yellen expressed confidence in regulators after meeting on SVB, THE ECONOMIC TIMES (Mar. 11, 2023), https://economictimes.indiatimes.com/markets/stocks/news/us-treasurys-yellen-expressed-confidence-in-regulators-after-meeting-on-svb/articleshow/98564385.cms?from=mdr.

[30] Miguel JimÃnez, The poker game threatening the world economy, EL PAS ENGLISH (Mar. 20, 2023), https://english.elpais.com/international/2023-03-20/the-poker-game-threatening-the-world-economy.html.

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