The Collapse of Silicon Valley Bank: A Deep Dive into the HTM Securities Debacle and Its Implications on the US and Indian Markets

The collapse of Silicon Valley Bank and its potential impact on the US and Indian stock markets has created a sense of panic among investors worldwide. As one of the foremost banks catering to startups, the bank had amassed a considerable amount of investment from VC funds and early-stage startups. The bank's model primarily relied on taking in deposits and lending out money to startups, but with rising interest rates, the bank found itself facing operational challenges.

The early stage startups are supported by significant investors who provide them with funding to grow their businesses. However, a substantial portion of this funding may be kept in a bank, such as Silicon Valley Bank, while the company uses some of it for hiring, building operations, and product testing. As a result, startups often deposit their money with such banks and 50% of US tech and life science startups have previously used Silicon Valley Bank. The primary function of any bank is to take money from depositors, like individuals, and loan it out to others for a profit. However, Silicon Valley Bank faced operational and withdrawal problems as not too many startups were borrowing money due to high interest rates, making it difficult to lend out deposited money. Peter Thiel, Gary Tan, and other well-respected VC investors caused panic in the startup ecosystem community by advising their portfolio company to withdraw their funds from the bank, leading to a massive sell-off of assets at a significant loss. Startups began to withdraw their cash from Silicon Valley Bank as they had cash lying around and the cost of borrowing became high.

Lastly, the crisis was exacerbated by Silicon Valley Bank's bad investments. Silicon Valley Bank's balance sheet shows they have something called held-to-maturity securities, and the total quantum of these securities is roughly $91 billion, with a fair value of $76 billion. This means there is a loss of roughly $15 billion on these securities. Held-to-maturity securities are bonds, and the bank buys these securities at a discount and they mature at face value. The type of maturities that Silicon Valley Bank bought was 30-year securities, and it typically held onto these securities until maturity. The bank could also sell these securities in the secondary market in case they needed to avail the money immediately. However, if the interest rates in the economy rise, the price of these securities decrease, which leads to a decrease in the value of the bank's balance sheet. This loss is manageable if the bank's balance sheet is strong, but if the bank's equity value is low, the bank is likely to collapse. Silicon Valley Bank had a loss of $15 billion, while the value of total equity was roughly $16 billion. The bank's collapse was inevitable, especially when investors created panic and startups withdrew their cash. The bank had to sell its assets at a massive loss to create additional liquidity.

The collapse of Silicon Valley Bank has understandably created concern among investors, with the US Nifty Bank declining by roughly 12% over the last five trading days. While the collapse of the bank may not have an immediate impact on Indian stock markets, it is still a cause for concern. The collapse of Silicon Valley Bank is not an isolated incident, and it highlights the fragility of the startup ecosystem. While startups have undoubtedly changed the way businesses are created and run, they are also prone to risks, particularly when it comes to funding.

As the fallout from the collapse continues to unfold, it's essential for investors and startups to be vigilant and manage their risks carefully.