SVB seems to be more concerned about ethnic, gender and sexual minorities than on banking issues
Woke fads are tolerable when celebrities and publicity-hungry people indulge in virtue-signally, but when wokeism (or any other fashionable but facts-dodging doctrine) invades something as serious as banking, the consequences can be catastrophic.
The recent collapse of Silicon Valley Bank (SVB) is illustrative of this truth. The quake that resulted in the shutting down of the bank also occasioned tsunami waves which hit the Indian shores and rendered the equity investors poorer by lakhs of crores of rupees. Set up in 1983, SVB was America’s 16th largest commercial bank at the time of its demise.
With operations in Canada, China, Denmark, Germany, Ireland, Israel, Sweden and the United Kingdom, it served every second VC-backed hi-tech company. Boom in the IT and life sciences sectors helped SVB as well; extremely low interest rates, brought down by the Fed to boost growth, also helped. Then there were also stimulus packages announced by the US Government which ran into trillions of dollars.
That, along with the Ukraine war, resulted in high inflation in the US, which in turn forced the Fed to adopt a hawkish stance. Interest rates went up by 450 basis points, or 4.5 per cent, in a year. This meant that the securities bought by SVB during the low interest-rate period lost considerable value, since interest rates have an inverse relationship with bond prices. The SVB bond portfolio’s yield declined to an average of 1.79 per cent return last week, which is much less that the 10-year treasury yield of around 3.9 per cent.
It needs to be mentioned here that bad debts, euphemistically called non-performing assets or NPAs, were not SVB’s problem. It didn’t become kaput because big tech firms went bust or defaulted.
It was not a case of what is called the twin-balance-sheet problem in India: big companies taking their bankers down with them. SVB’s assets, including loans, actually went up more than three times from 2019-end to March 2022, from $71 billion to $220 billion. Last week, S&P Global and Moody’s downgraded SVB, triggering the collapse.
There was a run on the bank. Signature Bank, a New York-based lender, was the collateral damage. The fall of SVB and Signature Bank is the biggest banking crisis in the US after the 2008 financial meltdown. And all this is not the result of some black swan event, of something unprecedented and unpredictable like Covid-19.
The reason is simple: incompetence and flippancy. Those who run banks and corporations know that ups and downs are facts of life; they make provisions for a rainy day. They know that change is the only constant in life, that interest rates go northwards and southwards, that government policies change. They are, or ought to be, nimble-footed and focused on facts. SVB, however, seems to be more concerned about promoting ethnic, gender and sexual minorities, as evident from its board, than on banking issues. The consequences are for all to see.
