 US authorities have seized control of Silicon Valley Bank to protect depositors at the California-based bank as banks' woes sparked fears of contagion in the sector. One big banking card easily starts tipping over other cards. It's a house of cards. Tech startups have been the great hope for capitalism in the past few years. Till about a year ago, they were doing brilliantly as consumers went digital, especially during the COVID lockdowns. And a large part of the savings of the world went into funding startups. Now, most of us have heard of Silicon Valley, the home of tech. Much like Manchester was once the home of textile factories. And Detroit was synonymous with cars at one time. But most of us hadn't heard of was Silicon Valley Bank. At least till just a few days ago when it became the second largest bank in America's history ever to have failed. What was Silicon Valley Bank and why has its collapse scared the entire startup ecosystem across the world, including India? Silicon Valley Bank or SVB was set up in 1983 with the express intention of becoming the banker for tech companies and also for those funds who financed tech companies. As of the end of last year, SVB claimed that it was the bank for nearly half of America's venture capitalist bank backed startups. And that 40% of all VC backed tech and healthcare startups that had IPOs in 2022 were the bank's clients. That's a very large number of companies in a very large market. Till the US government finally stepped in a few days ago, huge number of companies which banked with SVB had their money stuck in it when it failed. That means that they were not able to pay salaries or pay their vendors. Even startups who did not have anything to do with Silicon Valley Bank were affected because they transacted every day with other companies which did have their money tied up in SVB. That is why, Y Combinator, the most famous incubators for startups, it dives and funds about 3,000 companies, got people to sign a petition asking the US government to intervene, which it now has to a certain extent. Y Combinator called the SVB bank failure an extinction level event for startups and claimed that if help didn't arrive immediately, some 10,000 companies would be badly hit and one lakh people would lose their jobs. Of course, some of this is fear mongering to force governments and central banks to bail out startups. But it is also true that startups have been in trouble over the past year or so. In fact, SVB might not have faced this crisis if it had happened 15 months ago. At that time, the startup ecosystem was flush with funds and companies were depositing much more money in banks than they were taking out. Between the beginning of 2020 and early 2022, in two years, startups and those who invest in startups deposited some 150 billion dollars in Silicon Valley Bank. That was three times what SVB had as deposits before 2020. But over the past one year, that has reversed. Startups had to dip into their cash to run their operations because as we all know, startups are mostly loss making. They burn much more cash than they earn. As far as Silicon Valley Bank goes, it's net deposits, that is, the difference between deposits and withdrawals was dropping fast. By the beginning of March, it was left with deposits of about 175 billion dollars. There's still no problem here because in the last nine months of 2022, the bank's clients were withdrawing about two and a half billion dollars more than what they were depositing every month. At that run rate, Silicon Valley Bank still had enough money left to last for another six years. The problem had to do with what it did with the deposits. It had got from clients at its peak. It invested a large chunk of the 200 billion dollars in safe, long-term government bonds. Now, when you buy a bond, it is like giving a loan to someone on which you will earn a fixed interest. But unlike loans, bonds can be easily bought and sold in the market. Now, when interest rates go up, the price of the bonds you hold will go down. Why? Because new bonds will be issued in the market at a higher interest rate which will make the bonds you hold less attractive. Now, as long as you hold your bonds till they mature, you won't lose anything. But if you try to sell the bonds early, the only way to get buyers will be if you sell the bonds at a discount or cheaper than the new bonds in the market, which promise a higher interest rate. Silicon Valley Bank had initially planned to hold all these government bonds till maturity. But as its deposits began to dwindle, it decided to raise money by doing two things. First, by selling some of its government bonds and second, by selling some of its equity to raise money from the stock markets. The trouble was that in 2022, interest rates had shot up in the USA, causing bond prices to drop sharply. So the only way to sell these bonds was to take a loss on them. On the 8th of March, SVB announced that it had sold some $21 billion worth of bonds at almost a $2 billion loss. It also announced that it plans to sell shares to raise $2.25 billion. SVB thought this will reassure its clients and investors. But the exact opposite happened. The markets got spooked, thinking that if the bank was ready to take a hit on its bond investments, it must already be in deep trouble. SVB's shares tumbled and some of its big depositors decided to immediately withdraw their deposits. Word spread like wildfire in the startup world and SVB's clients rushed to take their money out. On the 9th of March, depositors tried to take out $42 billion from the bank. It was an amount that SVB simply didn't have. So regulators stepped in and shut the bank down, freezing all transactions. As of now, depositors are once again being allowed to access their funds, but it will take some time for them to get it all back. The question that American regulators need to answer is how did they allow this to happen? How did they not monitor a bank whose deposits grew four times in the space of just two years? The answer to that lies in the nature of capitalism today and its relationship with the state. Finance capital drives the state and controls its various organs. That is why despite all the pious talk of increased supervision of banks after the 2008 financial crisis, nothing has really changed. This time too, there will be calls for increased regulation of financial institutions and the authorities will make all the right noises. Nothing will change. People will forget the media will turn a blind eye till another bank falls in a few years. And once again, the government will bail it out and the average taxpayer will pay for it. That's the show today. 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