Understanding the recent closure of Silicon Valley Bank’s Australian operations

 

What is Silicon Valley Bank?

Silicon Valley Bank (SBV) is a US-based financial institution that was established in 1983. It primarily serves the technology and life science industries, gaining popularity for its innovative approach to lending to emerging technology companies, many of which were based in Silicon Valley. Its success eventually led to their expansion, with branches now in Europe, Asia, and Australia.

 

What does the ‘collapse’ of Silicon Valley Bank really mean?

SBV had been struggling to meet its regulatory capital requirements, which led to the Australian Prudential Regulation Authority (APRA) stepping in and ordering the bank to close its Australian operations immediately as of March 2023.

SBV’S Australian operations had been experiencing losses for numerous years according to past reports. This was primarily due to its focus on providing lending services to startups in the technology and life sciences industries. These industries are typically high-risk, and the bank’s portfolio had a high concentration of loans to startups that had not yet generated revenue or profits. As a result, the bank was not able to generate enough capital to meet its regulatory requirements, leading to the closure of its Australian operations.

Following their collapse, other large global financial institutions are also being impacted by the negative sentiment, such as Credit Suisse. Their shares saw a steep decline in price by 24.24% on Wednesday, 15 March. Australian financial institutions are also seeing significant decreases in stock price.

 

What are the implications on investors?

The collapse of the SVB may have serious consequences for both investors and businesses. It raises concerns surrounding the level of stability within the US financial industry and poses the idea that given SVB was a major competitor within the US financial industry, could this potentially lead to the failure of other financial institutions that have similar investments.

Furthermore, it emphasises the hazards of lending to tech-based start-ups. The failure of the bank suggests that financing for technological enterprises and start-ups may be more vulnerable to economic downturns and market volatility than previously anticipated.

Given lending offered by SVB to its Australian clients has ceased as a result of the bank’s collapse, this prevents numerous startups and technology enterprises from using the bank’s specialist lending options. SVB’s Australian business had a portfolio of over 500 million Australian dollars in loans to startups and technology enterprises, according to past reports. These loans will need to be repaid or refinanced with other lenders as a result of the bank’s Australian operations closing, which cause financial distress for some businesses.

Furthermore, since SVB was one of the few lenders that specialised in financing to early-stage businesses, the bank’s closure in Australia may have greater impacts for the Australian startup environment. Startups in Australia may struggle to acquire the capital they require to build and develop their businesses if they do not have access to SVB’s unique lending options.

 

What can we learn from this?

The SVB collapse highlights the importance of adequate regulatory oversight within the banking sector. With this case, APRA’s prompt action had likely prevented a more significant financial crisis. Secondly, and very importantly, the collapse emphasises the need for startups and emerging technology companies to have a diversified range of funding options. Given the high-risk nature of both start up and tech-based businesses, solely relying on one lender can be risky.

On a positive note, the Australian government has a scheme in place known as the Financial Claims Scheme, which provides a safety-net for deposit-holders. Eligible deposits are guaranteed up to a limit of $250,000 for each individual account holder.

 

Ultimately, the collapse of Silicon Valley Bank’s Australian operations highlights the risks associated with investing in emerging technology companies and raises concerns about the overall stability of the US banking system. While the failure of the bank has significant implications for US investors and Australian startups, it also provides valuable lessons for regulators and emerging technology companies.

To understand more about how the recent banks’ collapse may affect you or if you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.

<a href=”https://www.freepik.com/free-photo/businessman-suit-protecting-wooden-blocks-from-falling-domino-effect_17344712.htm#page=2&query=bank%20collapse&position=0&from_view=search&track=ais”>Image by wirestock</a> on Freepik

RECENTLY ADDED

Investments|

Why You Don’t Need a Fortune to Start Investing

May 17, 2024
Retirement|

How Inheritance Can Shape Your Retirement

May 15, 2024
Budgeting|

The Financial Journey of Raising Children

May 14, 2024
Investments|

The Synergy between Gearing and Dollar-Cost Averaging

May 9, 2024