Bank Gone Bankrupt. Silicon Valley Bank & The Five Consequences To The Economy.
Silicon Valley Bank (SVB) has long been a symbol of the tech industry's growth and success. As a bank that specializes in lending to startups and venture capitalists, it has been a key player in the Silicon Valley ecosystem. However, the recent bank run on SVB has brought the institution to its knees, leaving many to wonder what went wrong.
Now there is increased uncertainty in an already volatile economy where every dollar will matter. The bank's collapse will have five effects on the economy that will be felt for years from now similar to post-2008.
Table of Contents
The Bank Run
On March 9th, 2023, the insolvency of SVB was imminent as it was bleeding cash left & right. Within hours, hundreds of depositors rushed to withdraw their money from the bank, causing a bank run. The situation quickly spiraled out of control, with lines forming outside of SVB branches and ATMs running out of cash.
The Causes of the Bank's Downfall
The bank run was not an isolated incident. SVB had been facing financial troubles for months prior to the event. The bank's loan portfolio was increasingly risky, with many of its loans going to startups that were not profitable yet.
Many of SVB's clients struggled to raise funds, making it difficult for them to repay their loans. As a result, SVB's loan portfolio was becoming increasingly delinquent.
Additionally, SVB had invested heavily in bonds, which had suffered a significant drop in value when interest rate hikes occurred.
The bank's troubles were compounded by investor pressure, causing the stock's value to drop significantly.
Consequences on the Economy
The fall of SVB is not just a blow to the tech industry. It will have far-reaching consequences on the economy as a whole. Here are five ways in which the bank's downfall will impact the economy:
Loss of Confidence: The bank run on SVB has shaken the confidence of depositors in the banking system. This could lead to a broader loss of confidence in banks & corporate institutions.
Impact on the Tech Industry: SVB's collapse will significantly impact the tech industry, which relies heavily on the bank for financing. Many startups will struggle to find alternative sources of funding, which could slow down innovation and growth in the sector. The worst-case scenario is that many startups go out of business more quickly or are bought up in cheap acquisitions.
Job Losses: As startups struggle to raise funds, they will be forced to lay off employees. This could lead to a wave of job losses in the tech industry & other types of jobs that can be done remotely.
Economic Slowdown: The tech industry has been a key driver of economic growth in recent years. The fall of SVB could lead to a broader economic slowdown, as the tech industry is forced to retrench along with depositors of SVB.
Bailout Costs: If SVB is unable to recover, it could require a government bailout. This would be a significant cost to taxpayers and could lead to a loss of confidence in the government's ability to manage the economy.
Jim Cramer's Role
Jim Cramer, the host of CNBC's Mad Money, has been a vocal supporter of SVB in recent years. He has praised the bank's growth and touted it as a strong investment opportunity. However, Cramer's overhyping of SVB may have contributed to the bank's downfall.
Cramer's bullish statements about SVB may have encouraged investors to pour money into the bank, even as its financial troubles were mounting. This could have led to a bubble in SVB's stock price, which eventually burst when the bank's troubles became too great to ignore.
Fun Fact: there is an inverse ETF that tracks all of the stocks Jim Cramer has been bearish on. The ETF is called the Inverse Cramer ETF also known as SJIM & is currently actively trading.
Lessons to be Learned
The fall of SVB is a cautionary tale for the tech industry specifically. It highlights the risks of relying too heavily on one source of banking and the dangers of overhyping companies like SVB. Here are some lessons that the industry can learn from SVB's downfall:
Diversify your portfolio: Investing all your money in one place can be risky. Diversify your portfolio across multiple investment options to minimize your risk.
Stay up to date with regulations: Financial regulations can change quickly, and it's important to stay informed about the latest changes. Ignoring or violating these regulations can have serious consequences.
Maintain transparency: Honesty and transparency are key to building trust with customers and investors. Companies should be upfront about their financial situation and provide regular updates to stakeholders.
Focus on risk management: Banks are in the business of managing risk, and companies should adopt a similar approach. Identify potential risks to your business and take steps to mitigate them.
Have a contingency plan: Unexpected events can happen, and it's important to have a plan in place to deal with them. Companies should have a contingency plan for situations like a bank collapse or other financial crises.
Prioritize customer service: Banks that prioritize customer service are more likely to retain customers even in difficult times. Companies should focus on providing excellent customer service to build loyalty and maintain customer satisfaction.
Build a strong brand reputation: A strong brand reputation can help a company weather a crisis. Companies should focus on building a positive brand image by delivering quality products and services, being transparent, and building trust with stakeholders.
Stay agile: Companies that can quickly adapt to changing circumstances are more likely to survive in a crisis. Being agile and responsive to changes in the market can help companies stay ahead of the curve.
Overall, the collapse of a bank can serve as a cautionary tale for companies and startups. By learning from these events and adopting best practices, companies can improve their chances of success and weather any potential financial storms.
In conclusion, the fall of Silicon Valley Bank is a reminder that even the most successful institutions can fall. The tech industry must learn from SVB's downfall and take steps to diversify financing sources, be realistic about growth prospects, and manage risk carefully.
Only then can the industry continue to thrive and drive economic growth in the years to come.
But for now, let the chaos unfold.
SVB is one case study on the wider economic challenges the world faces. Check out this article about heat waves in China affecting much of their manufacturing.
-Dierking, D. (2023, March 2). The Inverse Cramer ETF Is Live! ETF Focus on TheStreet: ETF Research and Trade Ideas; ETF Focus on TheStreet: ETF research and Trade Ideas. https://www.thestreet.com/etffocus/blog/inverse-cramer-etf-is-live
-Mascarenhas, N. (2023, March 16). SVB: Here’s a timeline of the bank’s failure. TechCrunch. https://techcrunch.com/2023/03/16/svb-crash-timeline-what-happened/
If you've enjoyed this post consider following me on LinkedIn! Or check out more of my personal work on my other site.