why startup’s favorite bank closed

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Banking regulators in the US shut down Silicon Valley Bank (SVB) on Friday. This has caused concern in the tech and banking industries. The bank catered to a large number of startup companies, venture capitalists (VCs) and technology companies, and was the 16th largest bank in the US before its closure.

SVB is the second bank after Silvergate to close. After this, on Sunday, US banking regulators also closed the doors of the third bank ‘Signature Bank’ this week.

It is worth noting that this is the second biggest banking crisis in US history after the 2008 recession. Earlier in September 2008 Washington Mutual Bank was locked. Its assets were $307 billion and deposits were $188 billion. Prior to its closure, SVB had assets of $209 billion and deposits of $175 billion.

What is Silicon Valley Bank?

Started in 1983 in Santa Clara, California, SVB was one of the biggest supporters of the tech industry. By 2021, nearly 50 percent of US venture-backed startups will be affiliated with the bank. Apart from tech companies, it also provided service to media companies like VOX Media.

Many cryptocurrency companies also had deposits in the bank. Circle has said that SVB had deposits of $3.3 billion with it. Now-defunct crypto lender BlockFi also has $227 million locked up in SVB.

Why was SVB closed?

To understand the functioning of the bank, it is necessary to know the mistakes made in SVB. Basically this bank accepts deposits from its customers and then uses this amount to lend to other customers and invests the remaining amount.

Now like other banks, SVB also invests in safe options like bonds. After the recession of 2008, interest rates in the US came down significantly. This ensured cheaper loans and more investments by VCs in startups. This benefited banks like SVB as these startups gained trust with them for their deposits.

But as interest rates in the US rose, the yield on bonds declined. High interest rates fueled weakness in startup funding. Due to this, the speed of deposits in SVB also decreased.

On 8 March the bank said it had sold $21 billion of securities at a loss of $1.8 billion to ensure liquidity. It also plans to sell shares worth $2.2 billion. This raised concerns among the shareholders of SVB. The trading of the bank’s shares was closed on Friday. Regulators increased activism and closed this bank.

Will customers get their money back?

FDIC insured deposits up to $250,000. So customers with deposits of less than $250,000 will get their money back. Others will be likely to get some payment.

On Sunday, the Joe Biden administration announced that taxpayers will not suffer any losses as a result of the resolution process at SVB. In a joint statement, the FDIC, the US Fed and the Treasury Department said the US banking system remains sound.

Startups will be harmed?

The startup sector will face some problems at least for the next few weeks. According to a petition submitted by Y Combinator to the US government on Sunday, about 10,000 small business owners with SVB have deposits and will not be able to make payroll payments in the next 30 days due to the crisis. Around 1,00,000 jobs are estimated to be affected due to this crisis.

Many VC companies and startups in India have come forward to help other startups affected by this crisis. Alternative funding platform Recure Club has said it is allocating $15 million to Indian founders affected by the crisis.

Minister of State for Electronics and IT Rajeev Chandrashekhar tweeted that he would be meeting startup representatives this week.

Will Indian banks be affected by the SVB crisis?

According to reports, the finance ministry and analysts have said that the crisis will not affect India’s financial system. According to a report in BLiTZ, a senior official said, “We are not worried about the macro economic impact of this crisis domestically.”

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