- Silicon Valley Bank has a rich history of offering specialist financial services to the technology and life science industries. This helped the bank remain profitable during the financial crisis of 2008.
- Silicon Valley Bank reported a loss and is currently in a precarious financial situation. The reason for that is a rise in interest rates and a loss of investments from startups,
- The crisis at Silicon Valley Bank could potentially have a negative impact on the startup ecosystem in Latin America. However, it also presents opportunities for US startups to expand their businesses and recruit human talent from the region’s highly trained labor force.
- The US government has seized the assets of Silicon Valley Bank’s US operations. The reuslt: the biggest banking collapse since the financial crisis of 2008.
- While the full impact of the crisis is uncertain, there is a fear that it could potentially lead to a domino effect and a banking crisis similar to the one in 2008.
History of Silicon Valley Bank
- A commercial bank called Silicon Valley Bank (SVB) was established in Santa Clara, California, in 1983. The bank was founded to offer specialist financial services to Silicon Valley-based technology and life science businesses.
- SVB was one of the few banks that maintained a profit during the financial crisis of 2008. Mostly as a result of its cautious lending policies and emphasis on providing financial support to high-growth technology and life science businesses.
- In the years that followed, SVB kept growing its offerings and clientele, emerging as the industry’s top supplier of financial services to the innovation economy. The bank had more than 40 locations around the world as of 2021. Moreover, they offered financial services to more than 30,000 businesses in the technology and life science sectors.
America’s Silicon Valley Bank Reports a Loss
- Due to the rise in interest rates, startups have come under pressure. Many StartUps are customers of Silicon Valley Bank, and many of them have withdrawn their investments from Silicon Valley Bank.
- The CEO of Silicon Valley Bank Greg Becker said on Thursday that the company had sold its entire portfolio of assets. This brought in 21 billion USD. Nevertheless the Californian institution with strong ties to the IT industry disclosed a loss on the sale of securities of 1.8 billion dollars. Therfore they announced a capital increase.
Investors in Banks Worries About a Domino Effect
The share price of SVB Financial Group has fallen 70%, bringing down the whole global banking industry. Major U.S. banks like Bank of America were also attacked on Thursday evening. They losed more money than at any time in the previous three years. This is because investors are extremely concerned about additional loan defaults in the startup scene and the potential for a domino effect.
Response From Silicon Valley Bank And Investors
- The venture capital fund supported with emergency aid in the amount of 500 million dollars. However, a further USD 1.75 billion must be raised. Becker, the CEO of the bank, now desires to raise the final 1.75 billion via a capital increase. This, however, has little likelihood of success given the unstable state of the bank.
- SVB currently tries to reassure its customers that their money is safe. Bank CEO Becker now wants to raise the remaining 1.75 billion through a capital increase. This is the bank’s attempt to prevent further withdrawals of assets from the bank. The initial start-ups have apparently already been urged to withdraw even more payments from customers. More distress sales would subsequently be required by Silicon Valley Bank. This would lead to even more clients withdrawing their deposits.
- As investors in financial firms closely monitor other banks that might also be impacted by the crisis, emerging businesses or startups that need funding are looking for other lenders to deposit their money with.
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U.S. Authorities Seized The Assets of Silicon Valley Bank
Silicon Valley Bank’s US operations have been put on hold. The big bank’s assets were taken by bank insurer Federal Deposit Insurance Corporation. The public deposit insurance fund, or FDIC, claimed that guaranteed deposits from the California bank were moved to a new bank it had founded called DINB. According to the FDIC, the bank has $175.4 billion in deposits and $209 billion in assets.
As a result, it qualifies as the biggest banking collapse since the financial crisis of 2008.
Opportunities of Investment in Latin America
- The current crisis at Silicon Valley Bank (SVB) could have a significant impact on the startup ecosystem in Latin America if it leads to a domino effect on the US economy. As the banking sector faces financial damage. It also may reduce the willingness to provide startups with the necessary credits on a global scale. This would make it difficult for Latin American startups to grow.
- This situation may reduce investment operations of American banks in Latin American startups. However, it also creates opportunities for startups in the region. For example, it opens up new possibilities for US startups to recruit human talent from countries like Colombia. Colombia has a large and talented labor force of around 25 million workers, with about 3 million highly educated young people entering the labor market every year. Moreover, recruitment in Latin America is comparatively less cost-intensive, mainly due to lower wages.
- Furthermore, Latin American countries have many trade agreements in the region, such as the Pacific Alliance or MERCOSUR. These agreements provide a well-connected trade infrastructure. It makes it easy for US companies to expand their businesses into Latin America without incurring high tariffs.
- Therefore, although the current SVB crisis may adversely impact the startup ecosystem in Latin America, it also creates new opportunities for US startups to recruit human talent and expand their businesses into Latin America.
The consequences cannot yet be seen from the current perspective. However, the 17 branches of the bank are expected to reopen on Monday and customers will have access to this money again by then at the latest. Whether a domino effect can be prevented, which could lead to a run on other banks can also not yet be clearly said. Nevertheless, there is a fear that a banking crisis like the one in 2008 is possible.
While the effects on the US American businesses and Start Up environment are uncertain, it is evident that the rise of the Latin American economy will open up a number of economic opportunities, such as the recruitment of human talent from the region’s highly trained labor force.