SILICON Valley Bank (SVB), the 16th largest bank in America, is the latest major bank to collapse since the 2008 Financial Crisis.

SVB serviced Silicon Valley’s tech start-up industry, with an estimated 3,000 customers and firms affiliated with venture capital and private equity.

On Friday, Federal Deposit Insurance Corp (FDIC) took over SVB, effectively freezing all deposits made by tech firms. 

This comes after SVB on Wednesday revealed a US$1.8 billion (RM8.07 billion) after-tax loss on investments, seeking to raise US$2.25 billion in common and preferred stocks.

Panicking depositors pulled out their money in anticipation of a bank failure, meaning they would lose access to their deposits.

The FDIC has an insurance cap of US$250,000. Any deposits over this limit would not be guaranteed.

There is no way to find out how much clients will be able to recover from the bank’s US$151 billion worth of deposits over the FDIC Limit.

Silicon Valley firms have since rushed to secure loans in the event of a huge financial hit.

What happens next?

First and foremost, customers may lose any liquid capital deposited with the bank, as they wait to hear whether any of their funds over the US$250,000 cap will be salvageable.

As SVB reopens for insured deposits, uninsured customers are at great risk. Much of the damage is now cascading through Silicon Valley as 89% of SVB’s US$175 billion deposits at the end of 2022 were uninsured.

Employees at numerous tech companies may not get paid this month, with mass lay-offs a distinct possibility.

Start-ups are facing collapse if they run out of liquid cash. The fallout extends to tech companies with firm roots, which have survived previous scares and are now trying to find liquid funds to pay operating costs and service short-term debt.

How did SVB even get to this point?

As the 16th largest bank in the United States, SVB was up against other megabanks, such as Bank of America, JPMorgan Chase, WellsFargo, and Citigroup.

With relatively fewer resources and networks, SVB relied on higher deposit rates: 2.33% in contrast with the industry average of 1.17%.

This proved attractive to Silicon Valley-based companies looking for strong cashflow and revenue to prepare for a sudden product take-off, requiring almost immediate access to liquid capital. 

Its implicit connection to the tech industry has allowed its unprecedented growth by latching onto a symbiotic relationship with Silicon Valley firms. 

Now, this has proven to be a double edge sword. Investment has declined, as higher interest rates and a slowdown following an initial post-Covid recovery boom.

Mass lay-offs are a sign that a firm is suffering from a heavy financial burden and is unable to pay its debts. It appears that the collapse has finally caught up with banking system as well.

Domino effect on the horizon

The far-reaching consequences of SVB’s collapse might even lead to the bankruptcy of global companies with low liquidity and at risk of defaulting.

National banks will have to bail them out to avoid an economic collapse, further worsening debt burdens for the nation’s expenses.

This was the case in the 2008 financial crisis, when then-US President George W. Bush signed a bill to purchase US$700 billion worth of financial assets of failing firms at significant risk of defaulting.

During the height of the pandemic, US President Joe Biden signed over a total of US$4.6 trillion to a Covid relief fund, further straining the US’s debt burden.

If the worst-case scenario occurs and the US government has to bail the market out again, we can only imagine the devastating impact on inflation, investment, and consumption with a death loop.

This collapse will scoop up other banks as well. It is fairly evident as the S&P 500 banks index dropped 6.6% on Thursday, followed by 4.2% on Friday. Only time will tell how worse the fallout will be.

SVB effect on Malaysia

Our Budget 2023 aspired to strengthen Malaysia’s digital ecosystem, so inherently Malaysia would be seeking investors to build a tech start-up ecosystem.

However, the SVB phenomenon may halt this development since there will be a lack of funding.

There may be spill-overs from SVB’s meltdown, as the 2008 financial crisis affected the international market.

Imported goods may cost relatively more than previously, further driving inflation.

However, Malaysia has its economy mainly driven by domestic demand. This signifies that there are local alternatives that can sustain our country’s demand for goods and services.

A strategist at Morgan Stanley, Jonathan Garner, said Asia may be lesser impacted by SVB’s collapse.

Asia is regrowing with fewer concerns over asset quality. Malaysia may experience mild aftereffects from the SVB event, but local inflation may persist due to uncertainty from our global supply chain.

We expect some initial downturns in the Malaysian economy from Silicon Valley’s ripples.

For Malaysia to walk out of the crisis with minimal harm, our hope is that our local market is strong enough to meet demand, investors make informed choices, and Budget 2023 delivers. – March 15, 2023.

* Malcolm Wong and Sherilynn Ngerng are researchers at Financial Integrity for Youths.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.