SVB Crisis: What are its Implications on the Economy and Markets?

The collapse of The Silicon Valley Bank, which was ranked among the best banks in the US, has dealt a significant shock to the market. Let's examine the effects of the collapse on the markets and the economy.
VB crisis - Implications on economy and markets
VB crisis - Implications on economy and markets

The collapse of SVB, or Silicon Valley Bank, has sent shockwaves through the financial industry and has major implications for the broader market and economy. SVB, which specializes in providing financing to technology and innovation startups, has been a crucial player in the Silicon Valley ecosystem for decades. Its collapse signals not only the failure of one institution but also reflects broader economic and structural issues facing the tech industry.

What is the Silicon Valley Bank (SVB) Collapse?

SVB was a commercial bank, focusing primarily on the tech sector and start-ups. With borrowing being easy and cheap for new companies in the tech industry, they had substantial amounts of money to invest. Some of these companies chose to deposit their money in SVB. SVB used the funds to purchase longer-term debt investments to earn more money as interest rates decreased, without taking adequate protective measures. However, when the US Federal Reserve began to raise interest rates quickly, some depositors wanted to withdraw their funds. To return the money to the depositors, SVB had to sell its investments at a loss, which resulted in the bank losing money. Along with this, depositors began withdrawing money for better use when rates began to rise. This loss made it more challenging for SVB to continue operating.

Related | What Is The Impact Of the Fed Rate Hike On The US Economy? A Brief Explainer.

Related | How The Fed Rates Hike Can Impact India? Explained.

The impact of the SVB collapse

The immediate impact of the SVB collapse has been felt in the startup world, with many young companies struggling to secure funding and access to capital. SVB's loan portfolio, which includes many high-risk ventures, has been thrown into disarray, leaving many businesses without the financial support they need to grow and thrive.

The wider implications of the collapse are more far-reaching, however. SVB's failure is indicative of the growing financial instability within the tech sector, which has experienced rapid growth and expansion over the past decade. This has led to a proliferation of startups and other ventures, which have taken on high levels of debt and risk to fuel their growth.

Here is an update by a certified real estate investor on the effects seen in the economy one day after the collapse of Silicon Valley Bank:

The collapse of SVB could trigger a wider financial crisis within the tech industry, as other lenders and investors reassess their exposure to risky ventures. This could lead to a contraction in the availability of capital for startups, leading to a slowdown in innovation and economic growth.

The collapse could also have knock-on effects on the broader economy, as the tech sector has become a key driver of growth and employment in many regions. If the tech industry experiences a contraction, this could have ripple effects throughout the broader economy, including in areas such as real estate, manufacturing, and retail.

It could have significant ripple effects throughout the global economy. SVB is a key player in the tech industry, and its lending and investment activities help to fuel innovation and growth in this sector. If it were to fail, this could lead to a contraction in the availability of capital for startups and other ventures, leading to a slowdown in innovation and economic growth.

This could have knock-on effects on the broader economy, as the tech sector has become a key driver of growth and employment in many regions. If the tech industry experiences a contraction, this could lead to job losses and reduced economic activity, affecting not only the US but also countries that depend on the tech industry for exports and investments.

In terms of the Indian economy, the tech industry has become a significant driver of growth and innovation in recent years. The country is home to many startups and tech companies that rely on financing and investment from institutions like SVB. If a major player in the tech financing sector were to collapse, this could have significant implications for the Indian tech industry and the broader economy.

In addition to these economic implications, the collapse of SVB also raises important questions about the role of financial institutions in fostering innovation and growth. As the tech industry has grown, it has become increasingly reliant on specialized lenders and investors such as SVB to provide the capital needed to fuel innovation and disruption. 

The failure of one of these institutions highlights the risks inherent in this model and raises important questions about how best to finance and support innovation in the future.

It still remains to be seen how far-reaching the implications of the bank’s collapse will have on the global and national economy.




What caused SVB to collapse?

When the Federal Reserve started increasing interest rates, SVB depositors began withdrawing their money in search of better returns elsewhere, since deposit rates were not rising as quickly. This forced the Silicon Valley Bank to sell its investments, resulting in mark-to-market losses. The combination of the deposit run and investment losses severely impacted the bank's solvency. Hence, the crisis.

What is the SVB crisis?

Following the 2008 financial crisis, the Silicon Valley Bank, headquartered in California, suffered one of the largest bank failures. Within just two days of the announcement, the bank experienced a significant decline in deposits, leading to the organization of share sales. As a result, both investors and customers abandoned the bank in droves.
Get the latest General Knowledge and Current Affairs from all over India and world for all competitive exams.
Jagran Play
खेलें हर किस्म के रोमांच से भरपूर गेम्स सिर्फ़ जागरण प्ले पर
Jagran PlayJagran PlayJagran PlayJagran Play