Silicon Valley Bank‘s (SVB) 48-hour collapse was
fed by its focused business model of lending to startups that are facing an equity funding drought. The pressure on startups to borrow is particularly acute with the
US Federal Reserve cranking up interest rates. Banks across the globe are experiencing an erosion of their bond portfolios as treasury yields climb. The chances of a wider fallout on the global banking system are low, however, as the particular set of circumstances SVB faced – a surge in technology borrowing accompanied by falling bond prices – is unlikely to recur with the same intensity in other industries. The US Federal Deposit Insurance Corporation has created a bridge bank for SVB customers, the
US Treasury has backstopped deposits above the maximum government-insured level, and the Federal Reserve has opened an emergency funding pipeline for banks. These should stop the contagion in the US. Monetary authorities in other countries do not expect much of an impact given SVB’s limited presence overseas.
The fallout may have been contained, but the cause of SVB’s collapse remains. The markets are betting the SVB incident will temper the Fed’s zeal to combat inflation. US treasury yields are softening on expectations that the US regulator could slow or even pause its rate-hiking tempo when it meets later this month. Fed chair Jerome Powell has, however, repeatedly reminded markets that the economy needs to brace itself for pain. The Federal Reserve has historical evidence from the 1980s that premature lowering of guard can lead to greater subsequent distress in order to control inflation. If the coordinated response over the SVC collapse by the FDIC, Treasury and Fed works, the US central bank is unlikely to take its sights off inflation.
The startup ecosystem will have to evolve coping mechanisms after the dust settles. SVB had an overwhelming share of uninsured deposits, and startups will gain from diversifying their banking requirements even before acquiring scale.
