On 10th March 2023, the 16th largest bank in the USA – Silicon Valley was shut down. After the 2008 US economic crisis, SVB became the biggest bank that failed and the second-biggest bank failure of all time. As per reports the collapse of the bank was triggered due to a decline in the technology sector and the strict new policies of the Federal Reserve which control the high inflation rates. Financial experts have different opinions on this, some think that it will harm the Indian tech startup ecosystem and some believe it will not impact much. Although, Silicon Valley Bank’s collapse is not a good sign for the tech industry especially when we are witnessing huge layoffs.
Reasons for Silicon Valley Collapse
During the tenure of 2019 to 2021 the SVB has witnessed immense growth in the technology sector as it was a peak for the tech sector globally. At that time the bank had more than enough deposits and assets. As we all know, banks kept a smaller amount of cash at the bank for daily activities and the rest they invested. Similarly, SVB also holds some amount in cash and the rest money they have invested in Treasury Bonds and various long-term debts.
Later on, the Federal Reserve increased the interest rates to counter the high inflation. And that is where the downfall of SVB starts as its low-risk and low-return investment becomes a high-risk investment. Now when investors buy the bonds at a high-interest rate the value of SVB declines.
At that same time, the customers of Silicon Valley banks started to withdraw their deposits from the bank as they are facing financial issues. For the accommodation of these customers, the SVB decided to sell its investment. But the bad luck continues and the sales come at a significant loss of 1.8 Billion US dollars. On 10 March the bank collapsed and As of now, the parent company of SVB has also filed for bankruptcy.
Impact of this Bank Collapse
- As per the news, the FDIC will compensate the amount worth 250,000 US dollars to each investor of SVB. If someone invested more than 250,000 In that scenario also receives they receive the amount mentioned above not more than that. Unfortunately, most investors have invested more than this amount.
- The tech industry will have to face challenges as the largest investor in the tech industry collapses. And we can see that happening many companies have started to cut costs by reducing their workforces.
- Stakeholders of SVB bank may not receive their money back.
- This kind of bank collapse that too of a larger bank will create a sense of doubt in the mind of the customer. It will raise questions such as “Is there money secured in Bank?” Also, this could lead to a situation when most people try to pull out their money from banks which makes the overall situation worse.
- Many financial experts believe that this collapse is the starting point of the recession in the USA.
Impact of Silicon Valley Collapse on India
- SVB is among the major lenders who invest in Indian tech startups. Failure of this bank will lead to a tough situation for those businesses that heavily rely on foreign investment.
- All the businesses that are dependent on the US market can witness a decline in growth, job opportunity and the ability to repay the debt.
- The amount of venture capital coming to India will also slow down for some time.
- It will lead to a situation where the demand for IT services is lesser and overall jobs in the IT sector will also reduce. As already Accenture layoff 19000 employees most of them from the IT department.
- Although this collapse has nothing to do with the Indian economy and will not harm the Indian banking system. The Indian economy is regulated by the RBI which takes many points into consideration for the measurement of the economy.
Silicon Valley collapse will have a huge impact on the companies which primarily work in the tech sector. Unlike the 2008 economic crisis this time the situation is not that worse. As of now for a short period, we can see a decline in the technology sector growth. Most of the investors will start taking out their money from the business. Many tech startups will face issues with funding and paying the payroll. Tech companies will freeze hiring or lay off a significant amount of the workforce due to losses and cost-cutting. Job seekers may face issues in finding a new job or getting the desired salary.
All of this seems a big problem but that too for a short period. As per the financial experts, it will take 6 months to recover from these circumstances and after that things will start running smoothly like earlier. Companies and job seekers do not need to worry about reasons being the impact of this for a short period and that too for a specific industry.