Touted as one of the top 20 banks in the United States and validated by the government to be in compliance with regulatory guidelines, nobody could have predicted that Silicon Valley Bank would become the biggest bank to collapse since the 2008 global financial crisis.
Primarily catering to start-ups, SVB proudly stated that its client base included “88% of Forbes’ 2022 next billion-dollar startups and 50% of all US venture capital-backed tech and life science companies.”
With global venture capital investment reaching all-time highs in recent years – USD 671 billion in 2021 and USD 445 billion in 2022 – start-ups undoubtedly received a massive influx of funds from VCs and needed a place to keep these funds. For many of these start-ups, SVB was their bank of choice.
While this focus on the start-up and VC sector established SVB as the “go-to bank for start-ups,” it has also increased the California-based bank’s exposure to risk with its lack of diversification and concentration on a sector that is considered risky and volatile.
What led to the SVB crash?
Founded in 1983, SVB once ranked as the 16th largest bank in the US and the largest bank in Silicon Valley based on deposits. With the surge in VC investments in start-ups in recent years, the 40-year-old bank aimed to put the money to good use. SVB invested in assets that were considered low-risk and safe, such as US treasury bills and government-backed mortgage securities.
However, as the US increased interest rates to combat inflation, the assets that SVB bought with lower interest rates began to lose value while its reserves also became vulnerable to the interest hikes.
To maintain its liquidity, SVB had reportedly sold USD 21 billion worth of securities at a USD 1.8 billion loss in early March this year and tried to raise USD 2.25 billion in capital to meet their customers’ withdrawal and loan requirements.
These actions spurred concerns about SVB’s financial position – not only did the bank’s stock plunge but panic spread across its customers, triggering a bank run where depositors withdrew up to USD 42 billion the following day.
To protect customers whose deposits were still tied with SVB, the Federal Deposit Insurance Corporation (FDIC) stepped in and took over control of the bank, promising that depositors will have access to their money and that taxpayers will not bear the brunt of SVB’s failure.
The impact of SVB’s downfall on the global start-up ecosystem
Following SVB’s crisis, many start-ups feared they would not be able to meet their payroll requirements and finance their operational expenses – and the impact went beyond the US start-up scene. India’s Minister of State for Electronics and Information Technology said Indian start-ups have about USD 1 billion in deposits with SVB and called for Indian banks to offer a credit line to those affected.
With the collapse of SVB – one of the world’s biggest lenders to tech start-ups – some experts think that start-ups have lost an important ally and that the start-up funding environment has become even more challenging, especially for niche sectors such as clean technology and life sciences.
Start-up financing is expected to become more conservative, and investors are more likely to be more cautious, amidst uncertainties in the market, rising inflation costs and distrust in traditional banking systems.
On the other hand, there are international banking experts who believe 2023 will still see significant initial public offerings (IPOs) by tech companies, with a resurgence in tech IPOs in 2024. According to Cliff Marriott, Goldman Sachs’ co-head of technology, media and telecoms in Europe, “2024 will be a big year for tech IPOs.”
Are MENA-based start-ups at risk?
Although a few regional start-ups such as Anghami, Careem and Kitopi bank with SVB, the financial contagion did not spread across the MENA start-up ecosystem. The bank’s financial debacle, however, did highlight the need for start-up-friendly banking and financing in the region.
One of the major differentiators of SVB was that it catered to early-stage start-ups, even those that did not meet the minimum criteria set by other commercial banks and financing institutions. Start-up founders are calling for enhanced access to bank accounts and financing instruments, as well as faster turnaround times for opening an account.
In the aftermath of SVB’s downfall, regional experts anticipate start-up investments in MENA to slow down as investors carefully weigh global market movements and how these will affect the region’s start-up sector both short-term and long-term.
This potential scenario underlines the need for local and regional banks to step up and provide viable funding programmes for start-ups to continue growing and innovating, which can ultimately prop up MENA’s start-up scene regardless of the ups and downs in the global start-up sector.
Is the UAE’s banking system secure?
Financial analysts may view the failure of SVB as the canary in the coal mine, especially after a series of banks faced a similar fate due to skyrocketing interest rates. A few days after the bank run on SVB, customers of New York-based Signature Bank made huge withdrawals due to fear of the banking contagion and wariness about the bank’s uninsured deposits.
Signature Bank, an institution that mostly dealt with real estate companies, law firms and tech-focused lending, then became the third biggest bank failure in US history.
Nearly eclipsing Signature Bank’s collapse, however, was the fall of Credit Suisse, one of Switzerland’s oldest and biggest banks, which was bought by its rival UBS for USD 3.2 billion. The 167-year-old bank’s shares plummeted and spawned panic among investors after Saudi National Bank, one of Credit Suisse’s main backers, said it will no longer be able to finance Credit Suisse, citing regulatory restrictions.
Though the comment ignited panic, financial experts point to the bank’s underlying issues and struggles as the main reason for the failure of one of Europe’s largest and most historic banks.
As major banks around the world collapse and face uncertainties, the UAE’s banking sector remains resilient and minimally impacted by the contagion. Aside from having little to no exposure to the contagion, local banks and start-ups in the UAE benefit from strong government support and generous incentives, which help minimise risk and lessen their vulnerabilities to global financial crises.
