LAST Friday, the tech industry in the US received a jolt. By late Sunday, catastrophe had been averted but not before the vulnerable innards of the tech industry stood exposed to the world.

The Silicon Valley Bank was in financial trouble long before it collapsed. One reason was that they had invested in bonds whose yield was lower than the rate of inflation. The bonds simply paid too little in interest even as the Federal Reserve began raising interest rates. This meant that the bank was not making as much money as it needed to meet the needs of its clients. When it tried to correct the situation, it ran into trouble.

Financial analysts and investors — jittery as ever in a climate of high inflation — took this as a sign of trouble ahead. Because the tech industry and tech investors are tuned into social media the panic spread fast, whetted by venture capitalists like Peter Thiel who said that anyone with money in the bank should withdraw it. It appears that many heeded this advice and started to withdraw huge sums of money causing a run on the bank. By Friday, the bank could no longer keep up with requests for deposits and collapsed. The Federal Deposit Insurance Corporation had come in and sent all the bank managers home, asking the tellers to stay.

The Silicon Valley Bank is not of the sort in which most people keep their money. Instead, the bank’s major clients were Silicon Valley tech start-ups. The bank was known for giving loans to borrowers who may have been considered risks by conventional banks. Tech start-ups kept their deposits in the bank. This meant that unlike other regular banks that have a huge number of clients most of whom have a few thousand dollars in savings and checking accounts, it had fewer clients and those clients had large deposits. Much of these were used by tech start-ups to pay their own creditors, and of course, their employees. At the time of its collapse Silicon Valley Bank had $209 billion in assets.

In the US, money in accounts insured by the federal government cannot just disappear because a bank collapses.

The episode showed that the bank’s collapse was a warning not only to the tech economy in the US but also abroad. This is because Silicon Valley Bank was one that helped tech start-ups from Mumbai to Beijing to open American bank accounts and be visible to venture capitalists that could fund the nascent companies. Many Indian start-ups, for instance, had accounts in the bank for just this reason and the fact that they wanted to have a global reach.

In the US, money that is kept in accounts insured by the federal government cannot just disappear because a bank collapses. The catch is that the amount of money that is insured is capped at $250,000. Usually, this would cover the vast majority of any bank’s investors but not in the case of Silicon Valley Bank. On Friday afternoon, none of them had any idea of how they would retrieve the deposits which have been wiped out overnight.

Foreign tech start-ups already face a particular disadvantage, because unlike many American account holders who can withdraw money and move it to other banks, they may not have another US bank account to move their money to. Foreign tech start-ups that kept their money in Silicon Valley Bank included companies like the Chinese biotech firm Zai Lab which kept over $1bn in it. Another was Indian gaming firm Nazara Technologies with $7 million. According to a petition submitted by start-up Y-Combinator, 10,000 Indian start-ups banked with SVB and thousands of Indians were likely not to receive a pay cheque.

The US government knew it had to act before markets opened to restrict the damage. By Sunday evening, they did just that, saying that anyone who had money in Silicon Valley Bank would have access to 100 per cent of their money on Monday. “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” it said. The sigh of relief from around the world was almost audible.

The US government can bail out banks or insure deposits because America actually pays its taxes and those taxes are actually used for purposes other than padding the bank accounts of whoever manages to grab power. The other reason, of course, is because the world reserve currency is the dollar. This is a reason, among others, why so much of the technology and innovation space is concentrated in the US, and even when it is not, the tech sector banks with the US.

Few governments can provide these sorts of safeguards where the government has enough money to step in and rescue banks and the companies that are dependent on them. Technology and innovation don’t just need talent; they also need money and then more money to back up that money. If India or China want to be a haven for tech, they would have to have the ability to do the same.

The Silicon Valley Bank is still a collapsed bank and while the US government can bail out banks it cannot avoid the political fallout from the use of taxpayer money to make things nice and easy for the world’s wealthy tech investors. Interestingly, the oversight and checks put in place by the Obama administration following the 2008 financial crisis would have given plenty of warning about the Silicon Valley Bank far sooner than the one received in this event. Sadly, those oversight and regulatory mechanisms were precisely the ones that were done away with by the Trump administration. All this will make for much mudslinging in the months to come as Democrats and Republicans fight it out over whose fault it all was.

The writer is an attorney teaching constitutional law and political philosophy.
rafia.zakaria@gmail.com

Published in Dawn, March 15th, 2023