Sunday, March 12, 2023

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.

SVB and Indian Banks 💰

SVC Bank (The Shamrao Vithal Co-operative Bank) issued a press release on Saturday saying it is completely unrelated to SVB (Silicon Valley Bank) - lol. SVC seems to have had its day in the sun, while SVB got locked in the dark.

Overdosing on all the chatter around SVB? Read on for a crisp roundup if you’re someone who’s built a blind spot on it. After all, the bank added to the bad news and negative sentiment. The week was pretty brutal with the Nifty falling 1%, Nasdaq down 4% and Hang Seng down 6%.

Crisp + Insightful stuff on SVB:

Who is SVB?

Silicon Valley Bank has been the go-to bank for the tech industry in the US. Half of all VC-backed companies were customers of SVB. The bank’s deposits had gone 3x between 2018 and 2021 with start-ups getting funded, and depositing their cash into the bank.

What happened?

The 40-year-old bank is no more! The sequence of events was pretty simple:

• SVB had parked an unusually high amount of money in bonds and mortgage-backed securities
• With the funding winter in full swing, start-ups were withdrawing cash fast, and SVB’s deposits had been shrinking. To meet withdrawal requirements, it had to sell its bonds / MBS at a loss. It reported having sold some of its assets at a US$ 2 billion loss
• Investors and depositors started freaking out and VCs advised their portfolio companies to pull out their money, resulting in a bank run. The stock fell 60% and sent jitters across the markets
• The regulator - FDIC (Federal Deposit Insurance Corporation) stepped in and took control of deposits. FDIC is the DICGC of the US. It guarantees each account to receive US$ 250,000 when things go south

What is the impact?

• The good news: SVB is a relatively smaller bank in the US. It has about US$ 200 billion in assets, compared to some of the larger banks like JP Morgan Chase which are at more than US$ 3 trillion. Moreover, banks now are in much better shape compared to what they were during GFC. SVB’s crash isn’t likely to cause a full system meltdown.
• The bad news: Start-ups have already been strapped for cash. With their money inaccessible, they will feel the heat. They will either start cutting costs (more layoffs), shut down, or access other sources of funding resulting in a further liquidity crunch in the market. Eventually, VCs can become stressed too.

Why should I care?