The collapse of multiple banks in the US is a stark reminder that over exuberance and aggression can potentially lead to a breakdown of the system, but events like these also expose the ever widening gap between the traditional and emerging sectors of the economy. The recent collapses of Silvergate Capital Bank (SCB) and Silicon Valley Bank (SVB) in the United States of America have jolted the tech start up and venture capitalist community worldwide. Both banks had a combined deposit of approximately 180 billion dollars.
The recent crisis began with the collapse of the FTX crypto currency company which directly led to the collapse of the Silvergate bank which was one of the major backers of the crypto currency craze. Unsurprisingly the recent downturn in the crypto currency markets meant that this bank lost most of its capital and eventually incurred a loss of 718 million dollars in January as investors and depositors withdrew close to 8 billion dollars from their respective accounts. A similar Bank run was replicated at a much larger scale that led to the eventual collapse of the SVB. This particular bank mainly catered to tech startups and venture capitalists. After the collapse of the Silvergate bank and a drop in stock price of SVB most depositors decided to withdraw their money leading to withdrawals amounting to 42 billion dollars in a week. This eventually led to its bankruptcy.
The most fascinating part of this developing story relates to the fact that while both these entities provided services to industries that operated outside the conventional banking system, their demise surprisingly, was caused by the interest rate hikes made by the US government which reduced the value of treasury bonds that these banks relied upon.
It is here that we can take lessons from the unfortunate events of past weeks. The fact remains that traditional sectors of lending have been reluctant to fund emerging markets as most remain unregulated or are not supervised properly. This point was highlighted by MoS for IT Rajeev Chandrasekhar, who remarked that it was essential for the Indian government to provide proper banking and financial facilities to Indian startups within India so that they are not reliant on foreign banks for these services. As of now it is reported that 1.1 Billion dollars of Indian funds were kept in SVB and due to these funds being foreign funds were not insured by regulators in USA. He encouraged Indian banks to move beyond the traditional services provided by banks and engage with the Indian start up community.
For any nation to progress it is essential that the entrepreneurial zeal of emerging businesses is channelled appropriately. To achieve this ideal, it is essential that we create a holistic environment for startups and tech ventures. Moreover it is paramount that the conventional banking sector takes a leading role in creation and maintenance of this ecosystem as it would encourage responsible innovation, rather than speculative endeavours that contributed to the developments of the last two weeks.