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Silicon Valley Falls: Cracks Spread Across the United States’ Economy

Silicon Valley Falls: Cracks Spread Across the United States' Economy

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By Akerele Christabel

March 21, 2023
2:00 pm
Los Angeles, CA

The ripple effects of the tech bank’s failure is rapidly spreading across America’s industries. The fall of the Silicon Valley Bank (SVB) is a classic example of falling from grace to grass as the banking giant experienced a failure on Friday, March 10, 2023. It was the demise of an institution that had supported several startups to become successful businesses. Due to the increase in interest rates by the Federal Reserve, SVB had to sell their bonds at way below normal prices. This decision saw them incur a loss in the long run. After failing to raise funds in the area of $2.25 billion to ensure its survival, Silicon Valley Bank plummeted headlong into oblivion. In the hours and days that followed, the situation amplified. Federal regulators took over

The ripple effects of the tech bank’s failure is rapidly spreading across America’s industries.

The fall of the Silicon Valley Bank (SVB) is a classic example of falling from grace to grass as the banking giant experienced a failure on Friday, March 10, 2023. It was the demise of an institution that had supported several startups to become successful businesses.

Due to the increase in interest rates by the Federal Reserve, SVB had to sell their bonds at way below normal prices. This decision saw them incur a loss in the long run. After failing to raise funds in the area of $2.25 billion to ensure its survival, Silicon Valley Bank plummeted headlong into oblivion.

In the hours and days that followed, the situation amplified. Federal regulators took over SVB and shut it down by the afternoon, followed by an intervention by the Biden administration to protect depositors over the weekend.

Days have passed since the fall of the banking hegemon. Yet, the situation seems like the calm before a fierce storm. Tension is rapidly thickening above the US economy as citizens fearfully wait for the aftermath of the Silicon Valley Bank’s failure.

Tech startups are only the first victims in the long queue. As time passes and events unravel, it has become increasingly clear that the cracks of the bank’s fall will spread across the entire economy.

SVB funded a wide range of clients in Silicon Valley. Its demise affects not only tech companies but others that grew alongside startups, including non-profits, small businesses, Etsy sellers, Buzzfeed employees, and California wineries.

The failure of Silicon Valley Bank has had a significant impact on tech startups. Many tech startups rely on Silicon Valley Bank for financing, and the bank’s collapse has disrupted their access to critical financial services.

Furthermore, the SVB collapse has disrupted the venture capital industry, as many venture capitalists had invested in the bank. This has made it more difficult for tech startups to raise funds, as many have relied on the bank for their daily banking needs. Now, they have to find alternative solutions.

Signs of market unease have grown recently: the S&P 500 fell 4.6% this week, nearly erasing its gains for the year, while the Cboe Volatility Index, known as Wall Street’s fear gauge, surged to its highest level in 3 months. Yields on two-year treasuries saw their biggest plunge since the 2008 financial crisis, suggesting a flight to safety among investors and bets that economic distress may force the Federal Reserve to ease or reverse its aggressive tightening.

The fallout has hit many companies that did business with the bank. In the latest, Stablecoin USD Coin (USDC) lost its dollar peg and slumped to an all-time low after Circle, the U.S. firm behind the coin, revealed that Silicon Valley Bank held a chunk of the reserves backing it.

The bank’s failure will likely increase pressures on companies to become profitable, ending the era in which investors were willing to withstand years of losses to expand market share.

The nightmare is far from being over for other industries.

The healthcare industry has been particularly affected by SVB’s demise. SVB was a significant lender to healthcare startups, and its failure has left many of these companies without a major funding source. In addition, SVB was a prominent investor in healthcare venture capital funds, and its exit from the industry has left a vacuum in the market. Therefore, there will be a decrease in funding for healthcare startups, making it more difficult for them to acquire the capital they need to grow.

Ms. Cait Brumme, CEO of Mass Challenge, a nonprofit organization that has over 500 startups under its wings, said health and biotech companies have already faced challenges over the past year because of rising interest rates and the threat of recession. The seizure by federal regulators of Silicon Valley Bank amplifies the challenges: “The concern is that this only accelerates the negative impact,” Ms. Brumme said.

To prevent the situation from spiraling into a repeat episode of the 2008 economic disaster, President Biden asked Congress to pass legislation to give financial regulators broad new powers to claw back ill-gotten gains from the executives of failed banks and impose fines for failures.