Local Startups Need Financial Blanket In The Wake Of SVB Debacle Says Pikom

Last week’s news was dominated by the shocking crash of Silicon Valley’s commercial bank SVB, bringing with it painful memories of the Global Financial Crisis (GFC) when a run on some of America’s largest lenders precipitated a global recession more than two decades ago.

Many are asking the question of how this could happen once again to a major US bank when banking reforms introduced in response to the GFC would supposedly provide better safeguards against key risks related to credit, liquidity, market and operations.

Root causes of SVB’s fall

So, what gave rise to these risks at SVB?

SVB had been progressively affected by the downturn in tech stocks over the past few years. This impact was compounded by the rise in interest rates by the US Federal Reserve, ostensibly to ease post-pandemic inflationary pressure.

As a result, the value of SVB’s considerable holdings in US Government bonds plummeted. Such unrealised losses from government debt assets coupled with mortgage-backed securities purchased at low interest rates became the beginning of the end.

SVB found itself in the untenable position of owing more than it owned. In other words, its financial obligations to creditors and depositors exceeded the value of its assets.

This begs the question: how is it the mandated stress tests regulators require of financial institutions failed to pick up the warning signs? Or was it just too late for SVB to respond? The stress test is a forward-looking quantitative evaluation of bank capital that demonstrates how hypothetical macroeconomic recession scenarios could affect their capital ratios.

Potential contagion to banking industry? 

At this stage, market opinion is that the causes of SVB’s downfall are unlikely to impact on the wider banking landscape with the proviso that other banks are not facing the same predicament as SVB.

It must be said that SVB is unique as its clients are predominantly tech companies, many of which are funded by venture capitalists (VC). Unlike SVB, most banks avoid putting all their eggs in one basket, being much more diversified with a customer base in multiple industries and geographies.

That said, there are still lingering concerns that the SVB saga could lead to a run on banks since depositors are naturally prone to sentiment shaped by rumours and perceptions.

PIKOM’s Research Committee chair Woon Tai Hai says it is imperative that regulators and central banks assure the public that their banking systems are still sound! All these institutions understand that a bail-out is merely a short-term measure and is never a solid strategy for the longer term.

Any impact on IT and VC industries?

PIKOM says the immediate answer would be: SOME. It is inevitable that the tech and VC industries in Malaysia and other parts of the world would react by becoming more risk-averse. As a mitigation measure, the Malaysian Government should provide financial support or otherwise to start-ups and scale-ups.

Even so, the tech industry has to tread softly in view of the sustained headwinds and expected recession in many economies. This will only raise the pressure on financial systems, being the core pillar of business and industry.

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