The International Repercussions of the Implosion of Silicon Valley Bank
In this Chambers Expert Focus podcast, Kunchou Tsai, a partner at Enlighten Law Group in Taipei, and Sharon Hsu, a financial consultant at the firm, reflect on the sudden collapse of Silicon Valley Bank and the lessons foreign depositors should take from it.
Sharon Hsu
Similarities to and Differences From the 2008 Banking Crisis
The implosion of Silicon Valley Bank (SVB) was a long time in the making, but very few people seemed to anticipate its dramatic fall from grace; the bank had an acceptable credit rating and securities analysts were generally positive about it. On 9 March 2023, however, once it became clear that the bank had suffered significant unrealised losses due to rising interest rates, over USD42 billion in deposits were withdrawn in 24 hours.
“SVB had 50% of US VC-backed start-ups as customers, nearly 650,000.”
Initial comparisons to the collapse of Lehman Brothers in 2008 are potentially misleading. When Lehman fell it had roughly USD600 billion in assets; SVB was meaningfully smaller, with around USD100 billion. Nonetheless, the effect on venture capital is likely to be significant.
The Effect on Foreign Depositors
The vast majority of SVB deposits were above the USD250,000 threshold for federal deposit insurance, but US depositors were offered full protection, first by the Federal Deposit Insurance Corporation (FDIC) and then by First Citizens BancShares, which acquired the loans and deposits in March 2023. The same is not true for all foreign depositors.
The Cayman Islands branch of SVB was excluded from the First Citizens deal. Since the Cayman branch was primarily intended to facilitate SVB's services in Asia, major depositors of SVB in the Cayman Islands include multiple Chinese investment firms, who have been unable to access their funds and have been left in a state of uncertainty since the collapse of SVB.
“Nearly two dozen US-based Indian start-ups had deposited over USD1 million with SVB.”
Furthermore, a recent TechCrunch survey has revealed that nearly two dozen US-based Indian start-ups had deposited over USD1 million with SVB. These Indian start-ups, including businesses supported by prominent American VC firms, relied on SVB as their primary banking partner. However, they are now unable to access their funds, resulting in delays and financial difficulties.
Did the Lack of a Chief Risk Officer Lead to the Downfall of SVB?
Many people have noted that, at the time of collapse, SVB didn’t have a Chief Risk Officer. In testimony before the Senate Banking Committee, the former CEO of SVB, Mr Greg Becker, argued that they were in the midst of a search for a qualified candidate, and acted in good faith, emphasising that the leadership team made the best decisions they could with the facts, forecasts and outside expert advice available to them at the time.
While it remains unclear whether he will be taken at his word, it is certain is the market ahead is turbulent, especially for foreign depositors with cross-border operations. Such businesses would be wise to perform in-depth assessment before choosing their banking partners going ahead.
Enlighten Law Group
