The world agonizes over how the US deals with Silicon Valley Bank’s downfall

Silicon Valley Bank (SVB) was suddenly shut down by US regulators on Friday, March 10, 2023. The moves came as a continuation of frantic withdrawals amid concerns over the Bank’s financial health. The shutdown was followed by an announcement from the Federal Deposit Insurance Corporation (FDIC), an agency similar to the Deposit Insurance Agency in Indonesia (locally abbreviated LPS). The FDIC stated that it had taken control of the lender’s deposits and transferred its assets to a newly created entity, Deposit Insurance Bank of Santa Clara.

The FDIC said the SVB offices would reopen on Monday, March 13, 2023. So, customers whose funds are insured will be able to withdraw their deposits. Alas, 89% of the Bank deposits were not insured. This means billions of dollars cannot be withdrawn by customers.

The regulators asked SVB management to take a bail-in step, and seek capital from other banks to merge with SVB and thus safeguard the unsecured public deposits.

The causes of SVB’s downfall

Prior to its closing on Friday, March 10, SVB announced the previous week that it had lost $1.8 billion in asset sales, made in an attempt to raise capital to offset deposit outflows, and planned to float approximately $2.25 billion of new shares.

Alas, this announcement back fired, triggering more panicked withdrawals by customers. Once the run was on, the Bank’s stocks plunged 60% on Thursday and another 60% in pre-market trading on Friday.

The FDIC had to intervene and stop trading, as frightened depositors rushed to withdraw their money, making bankruptcy inevitable.

There are two main causes for the spectacular SVB collapse. The first tracks a fatal error from SVB management. The second is that SVB is too narrowly focused on internet startups.

SVB management – their fundamental error

SVB management invested shortterm deposits into long-term assets with fixed interest rates. When shortterm interest rates were hiked, the Bank suddenly failed.

SVB was too narrowly-focused on tech and startup financing

SVB is known as a bank focusing on financing technology companies and internet startups. Holding assets of around $209 billion and deposits of $175.4 billion, in 2022 the Bank was declared the 16th-largest US lender.

SVB was apparently under intense pressure due to fears of a recession, higher interest rates and a market slowdown for initial public offerings. These factors made it difficult for startups to raise additional money as nervous customers withdrew their deposits at SVB.

The FDIC stated that SVB offices would reopen on Monday, March 13, 2023, so insured depositors might withdraw deposits of up to US$ 250,000. However, according to regulators, 89% of the Bank’s deposits are uninsured, meaning billions of dollars have evaporated. According to Reuters, the agency is currently seeking a merger with other banks, which would allow SVB to safeguard unsecured deposits.

The SVB downfall shook the tech startup industry

The collapse of the tech and startup-focused bank came under a spotlight on social media. Angel Investors like SVB used to be praised for their role in developing tech startup companies, in the US and around the world. All praise withered this week, as the future of tech startups was hanging in the balance.

SVB’s failure is considered the biggest US banking system collapse involving mutual fund schemes, widely relied on for startup development. Now, however, mutual funds are predicted to become a new source of crisis in the financial sector, reflecting the 2008 financial crash.

The collapse of SVB has sent tsunami waves through European and Asian stock markets, which plunged Friday as investors began dumping US bank shares over the liquidity crunch.

Criticism of the handling of SVB’s failure

Many financial analysts scorn the way the US financial authorities attempted a rescue of the failing SVB, as those authorities deliberately let SVB collapse because they neither performed a bail-out nor provided guarantees for uninsured customer funds.

The way US financial authorities dealt with the SVB failure will resound with aggravated impacts in the US and abroad. The banking sector will face dire consequences after the SVB havoc. Systemic strains will start to emerge, expanding to a wider economic crisis in the US and around the world.

In fact, the way SVB’s bank failure was handled was atypical for the US, where financial authorities usually bail out failed banks; this was done during the 2008 financial crisis. They act as “the lender of last resort”, as regulators who bail out and guarantee all customer deposits in a ruined bank.

In Indonesia, we are aware of Bank Century, which was bailed out by the Indonesian financial authorities, eventually reborn as a new bank entity called “J Trust Bank”.

Game-changing and its consequences

What happened to SVB, left to twist in the wind, is an ominous sign that the game of saving the Bank has changed. “Rescues” with a big daddy rushing in with a bail-out have now been superseded by bail-ins, where Bank owners are to be held responsible for saving their Bank. Thus no more public money will be poured in to save incompetent bank owners.

This change resulted from public pressure and from taxpayers who objected that their taxes were used to compensate for the blunders of banking oligarchs. Lessons from the 2008 financial crisis.

But the “bail-in” game-change toward SVB may present severe consequences in the future and could even lead to a major banking crash.

After the SVB collapse, depositors around the world have started to realize what “uninsured customer deposits” really mean: customers from many other banks with uninsured deposits immediately pulled out their funds.

These massive withdrawals will likely result in the collapse of other banks like SVB, particularly those that use a mutual fund scheme to finance startup companies.

The third-round knock-on effect that might transpire following the shutdown of SVB is the end of many startup companies worldwide. Startups are known as the fastest and most innovative business entities globally. Lack of capital for a startup company will quickly cause the company to fail to make payrolls not long down the road.

The fourth-round effect will occur when other banks collapse, domino-style, after SVB, especially those engaged in startup financing. Their failure will soon spread like wildfire in world finance, with a new financial crisis blossoming in 2023 – a replication of the “15-year cycle” of the 2008 financial crisis.

Hopefully, the SVB crash will not result in a “great shock” to the financial world in Indonesia, although many financial institutions, both state-owned and private, carry out the same mutual fund scheme to finance startups here.

Nonetheless, Indonesian financial authorities must carefully examine the impact of SVB’s collapse on the Indonesian financial sector, at least by carrying out the latest supervisory updates so that monitoring of banking system risks becomes more effective.

Bear in mind that bank failures occur in part because of weak financial system risk oversight by financial authorities. Bank management may make mistakes, but why these mistakes are allowed to escalate is the responsibility of financial system stability authorities. In the latest Omnibus Law for the Financial Sector, the shared responsibility is now between Bank Indonesia, the Financial Services Authority, the Deposit Insurance Agency and the Finance Ministry, as the leading sector.