Connect with us

Headlines of the Day

As tech chiefs raced to contain SVB fallout, Feds stepped in to save it thankfully

Asia’s tech leaders, half a world away from the chaos that’s engulfed Silicon Valley, scrambled to assess the potential ramifications for an industry that’s always relied heavily on US capital and connections to supercharge growth.

They were saved from the exercise as last night, news filtered in that The US Treasury Department has intervened to guarantee deposits following the collapse of Silicon Valley Bank (SVB) and halt broader bank run jitters.

Secretary of the Treasury Janet Yellen, Federal Reserve Board chair Jerome Powell, and Federal Deposit Insurance Corporation (FDIC) chair Martin Gruenberg released a joint statement on Sunday night, US time, amid concerns of contagion spreading on Monday, creating an emergency program to protect all deposits at both California-based SVB and New York’s Signature Bank.

The intervention extends the existing FDIC scheme, which guarantees the first US$250,000 of deposits. But the problem for startups and investors is that many had millions or tens of millions of dollars deposited with SVB.

More than 90% of the funds deposited with the 40-year-old bank came from the startup ecosystem. The bank provided banking to around half of all US VC-backed startups, but imploded last week as customers tried to withdraw around US$40 billion in funds – nearly a quarter of the capital in the bank – before state regulators stepped in on Friday to take control. The FDIC is now the receiver of Silicon Valley Bank.

Concerns that startup founders would be unable to pay staff led to concerns of a dinosaurs-level extinction fears over the weekend amid pleas for the US government to intervene.

ASX-listed tech companies exposed to the SVB collapse fell in early trade on Monday morning before the US Fed announcement.
The Federal Reserve intervention also included the crypto-focused Signature Bank, which New York state regulators took control of on Sunday citing concerns about its viability.

Earlier over the weekend, news was that Asia’s biggest funds including Sequoia Capital China, Temasek Holdings Pte, ZhenFund and Yunfeng Capital had reached out to their portfolio companies to gauge how much exposure they have to SVB, according to the people, who asked not to be identified discussing a private matter. A Sequoia Capital China representative said the company couldn’t immediately comment, while ZhenFund didn’t respond to a request for comment during non-business hours. Temasek said it doesn’t have any direct exposure to SVB.

Yunfeng said it notified teams to do a quick internal inquiry into potential exposure to SVB and warned portfolio companies to take action to avoid risk. Yunfeng itself doesn’t have deposits with SVB.

“The impact of the SVB incident on the technology industry should not be underestimated,” analysts led by Liu Zhengning at China International Capital Corp. said in a note. Deposits are crucial for tech startups because they generally require a lot of cash to pay for hefty expenditures including research and development costs and staff salaries, they said.

“If these cash deposits finally have to be impaired in the process of bankruptcy or restructuring, some tech firms may face high cash flow tension,” the analysts said. “The risks of bankruptcy should not be excluded.”

Finian Tan, founder of Singapore-based Vickers Venture Partners, said his company survived relatively unscathed. Only one of its portfolio companies in the US has deposits at SVB, totaling $2.5 million, according to Tan.

“More than half of our portfolio companies are American so we are lucky that our banks are diversified,” said Tan, who expects that most of the deposit will be recovered eventually.

SVB became the biggest US lender to fail in more than a decade after a tumultuous week that saw an unsuccessful attempt to raise capital and a cash exodus from the tech startups that had fueled the bank’s rise.

Regulators stepped in and seized it Friday in a stunning downfall for a lender that had quadrupled in size over the past five years and was valued at more than $40 billion as recently as last year.

“There was a mismatch between liquidity and risk, which made it unsustainable,” said Richard Ji, chief investment officer of All-Stars Investment Ltd. which has less than 1% of its capital with SVB. He added that this was an educational moment for the industry to reassess other unsustainable practices including building growth based solely on high-leverage, low margins or regulatory arbitrage.

The move by California state watchdogs to take possession of SVB and appoint the Federal Deposit Insurance Corp. as receiver adds to the turmoil at smaller lenders caused by the US’s rapid interest-rate increases. Just days earlier, Silvergate Capital Corp. announced it was shutting its bank down, spurring a broader selloff in industry stocks.

In Asia, the fear is no less palpable.

SVB’s troubles are raising concerns particularly in China because the joint venture has been aggressively lending to startups and funds that can’t borrow from traditional banks, according to people familiar with the matter.

SVB set up its local arm, SPD Silicon Valley Bank Co., in 2012, and offers several banking products and services in China, including working capital and trade finance, according to its website. While the venture has sought to reassure its clients and portfolio companies, the extent of the damage for now remains unclear.

And while the direct impact to Asia is limited because of SVB’s focus on Silicon Valley, the collapse is set to affect the banking industry’s credibility.

“This is a specialist bank. So fundamentally it shouldn’t affect Asia,” said Vickers’s Tan. “But confidence or the lack of it is contagious.”

CT Bureau

Click to comment

You must be logged in to post a comment Login

Leave a Reply

Copyright © 2024 Communications Today

error: Content is protected !!