It took just 48 hours of depositors’ panic to bring down SVB (Silicon Valley Bank), the trusted ally of startups and innovative enterprises.
The experts are hopeful, though not quite sure, that the fall of SVB will not turn into avalanche. Also, there is the more or less unanimity that the crisis will not spread to Asia.
With sadness, the proverb comes to mind that the way to hell is paved with good intentions. — The people who believe they are doing good can end up doing the opposite – this is also called the law of unintended consequences.
The sadness is deep because SVB sided with those who dared to dream. The startups at the cutting edge of technology, the tech entrepreneurs with ideas not even their mom would bet on, the attractive but untested ideas, these were the kind of proposals welcomed at SVB. It was a bank like no other.
* * *
Here is a summarized version of what happened, based on the reports of Aljazeera, CNBC and Daily Mail:
SVB had nearly half of the country’s venture-capital backed technologies and life sciences companies as clients, and owned 3,234 companies — giving the bank the right to buy shares in them.
Its deposits then rose during the COVID pandemic, as more and more people wanted to protect their assets in the bank, with its deposits tripling in just a two-year span to $189billion by 2021, the Wall Street Journal reports.
Executives then decided to invest much of its excess funds in higher-yielding, long term bonds, along with $80billion in 10-year mortgage-backed securities that pay out 1.5percent rather than the short-term Treasury Department securities that pay out only 0.25percent.
That left the bank with a deposit base heavily skewed toward technology firms with huge accounts, over the $250,000 insured by the Federal Deposit Insurance Corporation.
By the end of 2022, a vast majority of the bank’s deposits, $157billion, were held in just over 37,000 accounts that were over the FDIC’s deposit-insurance gap.
It then continued business as usual, borrowing short-term from depositors and lending long-term without any interest-rates — even as Federal Reserve Chairman Jerome Powell warned that higher interest rates were coming.
As customers started to ask for their money back as the economy revamped, SVB had to sell $21million worth of its underwater long0term assets with an average interest rate around 1.8percent.
That meant that the bank lost $1.8billion on sales, leaving executives frantically trying to raise more than $2billion to fill the hole.
‘Management screwed up interest rates, underestimated customer withdrawals, hired the wrong people and failed to sell equity,’ Andy Kessler writes for the Journal.
* * *
The blurb for the Oxford Analytica webinar that will take place on 16 March 2023, says, “The contagion has already spread far and wide: major lenders to the cryptocurrency industry, Silvergate Capital and Signature Bank, are the most high-profile tech-focused institutions to go under in the United States, but promising tech firms in a wide range of countries – China, United Kingdom, Denmark, Germany, India, Israel and Sweden – are also heavily exposed to SVB. Since the foreign tech sector is not as robust as its US counterpart, many of these firms now face an existential crisis; many will cease to exist without a government bailout.
It says, “The collapse of SVB is the most prominent corporate casualty of the US Federal Reserve’s policy of raising interest rates to reduce inflation. The era of cheap money, on which a whole generation of tech firms have depended and bet on, has now come to a close. Yet this is not the only strain facing established and emerging tech firms: antitrust regulations, data security and privacy laws and cybersecurity obligations of digital services providers are tightening globally, and post-pandemic consumer demand is softer than ‘big tech’ anticipated.”
* * *
Central Asia can draw two sets of lessons from SVB tragedy.
The first set is about the entire approach toward the business of banking.
SVB admirably funded the green, innovative, eco-friendly projects. This was partly its undoing – there was not the requisite diversity in the portfolio.
For instance, of the total solar power projects in the USA, 62% were financed by SVB.
In financing the projects its was financing, SVB was playing the role that usually falls on the international and regional financing institutions such as ADB and EBRD, or the national development funds.
Part of the reason is that it is anathema for the American brand of capitalism to keep the government away from the business except where bailout becomes necessary.
In addition to lack in diversity in the portfolio, there was no professional acknowledgement of the fact that the Covid conditions had helped increase the deposit base of the SVB. In hindsight, there should have been some kind of plan to deal with the post-Covid situation potentially offering better alterntives than modest dividends from SVB.
There is also the fact that Fed had warned for the past six months that the interest rates would go up but SVB did not take any preventive measures. Perhaps part of the reason is that the position of the chief risk operator was vacant for 8 months. — Laura Izurieta left the bank in April 2022 and her replacement, Kim Olson joined in January 2023.
A team of conservative bankers would possibly have done the business differently. We are saying his without trying to attach an iota of blame to the team SVB. The bank itself was in a class of its own; not just the American but the enterprises and individuals from many other countries looked toward SVB for the financing of their bold ideas.
For Central Asia, it would be advisable to actively finance the new ideas but in doing so a form of public-private partnership should be available. In the ideal situation, the global and regional development and financing institutions, the development funds of the regional and friendly countries, the public, private and mixed-ownership banks, should all join hands to support the startup and innovative technology sectors. — Spread the risk.
The second set of lessons takes us to a sensitive territory.
There were several things that could be justifiable on their own but served as distractions in the responsible and professional management of SVB.
There was the unwavering focus on ‘woke initiatives.’ We will leave it at that without commenting further.
Jay Ersapah, the chief risk officer for the bank in Europe, Africa and the Middle East, organized a host of LGBTQ initiatives, including a month-long Pride campaign and implemented ‘safe space’ catch-ups for staff. This is also the area we will not delve into any further after mentioning it.
The bank implemented ‘a diverse candidate slate for US leadership roles’ and introduced its first six Employee Resource Groups for Asian, black, Hispanic, LGBTQ, veteran, military and female employees. And by the time the bank collapsed on Friday, SVB’s board included ‘1 black,’ ‘1 LGBTQ+’ member and ‘2 veterans.’
This is where we beg to offer a different perspective.
There is no doubt that we should be inclusive and refrain from all kinds of discrimination. However, when we are selecting a person for employment, we should sharply focus on whether they are best suited for the job. In doing so, we should not take into account their gender, sexual orientation, colour of the skin, ethnicity or anything else. This would be true inclusiveness.
If we insist on bringing in the members of the groups identified by SVB, we would be doing injustice to the people who are ‘mainstream’ but are better qualified for the job.
Once again, we are really sad about the downfall of SVB and hope something better arises from its ashes.
The banking and finance sector in Central Asia should study the case from all possible angle. /// nCa, 15 March 2023