Exploring Financial Cataclysm of Silicon

Valley Bank (SVB) and Analysing Credit

Suisse Fiasco Tangentially.
 Schema of Presentation

Silicon Valley Bank

S.No. Coverage
1. About Silicon Valley Bank and Factors Engendering its collapse.
2. Chronology of Collapse
3. Objectives of the Research Study
4. Research Methodology and its Linkage with the Objectives of the Research
Study
5. Limitations of the Research Study
6. Results and Discussion
 Schema of Presentation

Credit Suisse
7. Brief about Credit Suisse
8. Cracks in Credit Suisse
9. Repercussions
10. What Next

11. Way Forward

12. Scope for Further Research Study
 About Silicon Valley Bank
• Silicon Valley Bank, which catered to the tech industry for three decades,
collapsed on March 10, 2023, after the Santa Clara, California-based lender
suffered from an old-fashioned bank run.
• Silicon Valley Bank (SVB), a subsidiary of SVB Financial Group, was the 16th
largest bank in the United States. The bank had assets of about $209 billion in
December 2022.
• Silicon Valley Bank provided business banking services for companies at every
stage, but it was particularly well-known for serving startups and venture-backed
firms.
• According to the company’s website, 44% of the venture-backed technology and
health care initial public offerings (IPOs) in 2022 were clients of Silicon Valley
Bank.
 Factors Engendering Silicon Valley Bank Failure

• Raising of interest rates by Federal Reserve.

• Cash crunch for some Bank’s clients.

• Selling of Bond Portfolio at a loss.

• Loss in Stock Sale.

 Chronology of Collapse

Date (2023) Events

March 8 Silicon Valley Bank announced its $1.8 billion loss on its bond portfolio, along
with plans to sell both common and preferred stock to raise $2.25 billion.

In the aftermath of this announcement, Moody's downgraded Silicon Valley

Bank’s long-term local currency bank deposit and issuer ratings.

March 9 The stock for Silicon Valley Bank’s holding company, SVB Financial Group,
crashed at the market opening. Other major banks also saw their stock
prices take a hit.

Additionally, more SVB customers began withdrawing their money, for a total
attempted withdrawals of $42 billion.
 Chronology of Collapse

Date (2023) Events

March 10 Trading was halted for SVB Financial Group stock. Before the bank
could open for the day, federal regulators announced they would take
it over.

After regulators were unable to find a buyer for the bank, deposits
were moved to a bridge bank created and operated by the FDIC, with
a promise that insured deposits would be available by Monday, March
13.
March 12 Federal regulators announce emergency measures in response to the
Silicon Valley Bank failure, allowing customers to recover all funds,
including those that were uninsured.
 Objectives of the Research Study

• To decipher the bankruptcy of Silicon Valley Bank.

• To comprehend the contribution of Net Profit Margin, Assets

Turnover and Equity Multiplier to Return of Equity of Silicon Valley
Bank.

• To explore the impact of Interest Income on Net Profits and Non-

Interest Income on Net Profits of Silicon Valley Bank.
 Research Methodology and its Linkage with the Objectives of the Research Study

S.No. Research Methodology Linkage with the Objectives of the

Research Study
1. Altman Z-Score Model To decipher the bankruptcy of Silicon
Valley Bank.
2. DuPont Analysis To comprehend the contribution of Net
Profit Margin, Assets Turnover and
Equity Multiplier to Return of Equity of
Silicon Valley Bank.

3. Regression Analysis To explore the impact of Interest Income

on Net Profits and Non-Interest Income
on Net Profits of Silicon Valley Bank.
 Limitations of the Research Study

• The research study is based on the secondary data.

• Due to technical constraints other crucial financial facets of Silicon

Valley Bank, like Earnings Per Share, Non-Performing Assets, Return
on Assets, Ratios covered under CAMELS etc. and Overall US Bond
Market performance etc. could not be studied.
 Deciphering the Bankruptcy of the Silicon Valley Bank

 To comprehend the journey of bankruptcy of Silicon Valley Bank, Altman Z-Score

Model have been applied. In other words, through Altman Z-Score Model, an
endeavour has been made to ascertain the evolving fissures in the financial
structure of the bank.
 It is to be noted that Altman Z-Score Model have three variants-
(i) Publicly held manufacturing firms-
The formula for this model for determining the probability that a firm to close
bankruptcy is:
Altman Z Score formula = (1.2 x A) + (1.4 x B) + (3.3 x C) + (0.6 x D) + (0.999 x E)
 Deciphering the Bankruptcy of the Silicon Valley Bank

Financial ratio used The formula for the financial ratio

A (Liquidity Ratio) ( Current Assets − Current Liabilities )/Total Assets

B (Leverage Ratio) Retained Earnings/Total Assets

C (Profitability Ratio) Earnings Before Interest and Taxes/Total Assets

D (Solvency Ratio) Book Value of Equity/Total Liabilities

E (Turnover Ratio) Sales/Total Assets

 Deciphering the Bankruptcy of the Silicon Valley Bank

S.No. Altman Z-Score Inference

1 Z > 2.99 Safe Zone – Low likelihood of

bankruptcy.
2 Z value between 1.81 Grey Zone – Moderate risk of
and 2.99. bankruptcy.

3 Z value < 1.81 Distress Zone- High likelihood of

bankruptcy.
 Deciphering the Bankruptcy of the Silicon Valley Bank

(ii) Private firms

Z Score = (0.717 x A) + (0.847 x B) + (3.107 x C) + (0.420 x D) + (0.998 x E)

S.No. Altman Z-Score Inference

1 Z > 2.99 Safe Zone – Low likelihood of bankruptcy.

2 Z value between 1.23 and Grey Zone – Moderate risk of bankruptcy.

2.99.
3 Z value < 1.23 Distress Zone- High likelihood of bankruptcy.
 Deciphering the Bankruptcy of the Silicon Valley Bank

(iii) Non-manufacturing firms – Developed Markets

Z Score = (6.56 x A) + (3.26 x B) + (6.72 x C) + (1.05 x D)

(iv) Non-manufacturing firms – Emerging Markets

Z Score= 3.25 + (6.56 x A) + (3.26 x B) + (6.72 x C) + (1.05 x D)
 Deciphering the Bankruptcy of the Silicon Valley Bank

For (iii) and (iv)

S.No. Altman Z-Score Inference

1 Z > 2.60 Safe Zone – Low likelihood of

bankruptcy.
2 Z value between 1.10 Grey Zone – Moderate risk of
and 2.60 bankruptcy.
3 Z value < 1.10 Distress Zone- High likelihood of
bankruptcy.
 Deciphering the Bankruptcy of the Silicon Valley Bank

Since Silicon Valley Bank is a non-manufacturing organisation situated

in developed economy, i.e., USA, so for gauging bankruptcy of the
bank, Altman Z-Score formula provided under point (iii), i.e., Non-
Manufacturing Firms – Developed markets have been applied for
conducting the analysis.
 A (Working Capital / Total
Years Working Capital Total Assets Assets) 6.56 * A
2018 10730170 56927979 0.188486754 1.236473109
2019 20779272 71004903 0.292645594 1.919755095
2020 48566648 115511007 0.42045039 2.758154562
2021 41719 211478 0.197273475 1.294113998
2022 26307 211793 0.124210904 0.814823531

B (Retained Earnings /
Retained Earnings Total Assets Total Assets 3.26*B
2018 3791838 56927979 0.066607634 0.217140887
2019 4575601 71004903 0.064440634 0.210076468
2020 5671749 115511007 0.049101373 0.160070475
2021 7442 211478 0.035190422 0.114720775
2022 8951 211793 0.042262964 0.137777264

EBIT Total Assets C (EBIT / Total Assets 6.72*C

2018 1362909 56927979 0.023940934 0.160883078
2019 1610402 71004903 0.022680152 0.152410622
2020 1742 115511 0.015080815 0.101343076
2021 2724 211478 0.012880772 0.086558791
2022 2172 211793 0.010255296 0.068915592

D (Book Value of Equity /

Book Value of Equity Total Liabilities Total Liabilities 1.05*D
2018 5264843 51663136 0.101907151 0.107002509
2019 6621080 64383823 0.102837634 0.107979515
2020 8433491 107077516 0.078760615 0.082698646
2021 16609 194699 0.085306036 0.089571338
Years Altman Z-Score Inference
1.721499583 Since Z-Score lies between 1.10 and 2.60, thereby
indicating moderate risk of bankruptcy.
2018
2.390221701 Since Z-Score lies in the range of 1.10 and 2.60, it is a
metaphor of moderate risk of bankruptcy
2019
3.102266758 As Z-Score > 2.60, it is an indication low likelihood of
bankruptcy.
2020
1.584964902 As Z-Score lies between 1.10 and 2.60, moderate risk
of bankruptcy looms over the bank.
2021
1.109035184 Z-Score is almost equal to 1.10, thereby giving a vivid
indication of bankruptcy.
2022
DuPont Analysis – Analysing ROE through Net Profit Margin, Asset Turnover and Equity
Multiplier

Assets Equity
Years Net Profit Margin Turnover Multiplier ROE ROE (%)
2018 0.381733071 0.044812798 10.81285406 0.184970378 18.4970378
2019 0.353977253 0.045231581 10.72406662 0.171702502 17.17025017
2020 0.315329627 0.032698185 13.69749792 0.141230879 14.12308787
2021 0.305488436 0.027419691 12.72249985 0.106568728 10.65687278
2022 0.260486794 0.027352179 12.99742252 0.092605094 9.260509359

Mean 0.323403036 0.035502886 12.19086819

Standard
Deviation 0.046587933 0.008957684 1.346618457
Coefficient of
Variation 14.40553355 25.23085994 11.04612432
 Regression Analysis- Interest Income and Net Profits

Multiple R R Square F- Value

0.766440615 0.587431216 4.271514761

Result Analysis and Discussion

R-Square which is also known For v1= 1 and v2 = 3, F0.05 = 10.13.

The correlation coefficient value as Coefficient of Determination The calculated value of F is less
indicates fairly robust relationship indicates that 58% of the than the table value. Thus, it
between Interest Income and Net dependent variable (Net indicates that Interest Income has
Profits. Profits) is explained by the not influenced / exerted a positive
Independent Variable (Interest impact on the Net Profits of the
Income). Thus, it may be Silicon Valley Bank to a great
inferred that Interest Income extent.
has not exerted a high impact
on the Net Profits.
 Regression Analysis- Non-Interest Income and Net Profits

Multiple R R Square F- Value

0.914052252 0.835491519 15.23614186

Result Analysis and Discussion

The correlation coefficient between R-Square which is also known as For v1= 1 and v2 = 3, F0.05 = 10.13.
Non-Interest Income and Net Profits Coefficient of Determination The calculated value of F is more
is extremely high, thereby indicating indicates that 83% of the dependent than the table value. Thus, it
a strong relationship between the variable (Net Profits) is explained indicates that Non-Interest Income
two variables. by the Independent Variable (Non- has influenced / exerted a positive
Interest Income). Thus, it may be impact on the Net Profits of the
inferred that Non-Interest Income Silicon Valley Bank to a great extent.
has exerted a high impact on the
Net Profits.
 Impact on Indian Start-ups

• SVB has been a real supporter of the Indian start-up scene and provided banking services.
• Most of the start-ups of India that conduct business activities in the US, preferred Silicon Valley
Bank because it was one of the few financial institutions that exhibited willingness to work with
the Indian banks.
• Dozens of young Indian start-ups backed by the likes of YC, Accel, Sequoia India, Lightspeed,
SoftBank and Bessemer Venture Partners banked with Silicon Valley Bank, sometimes as their
only banking partner.
• Start-ups exposure to SVB are mainly of three forms- a) Money deposited with SVB Bank, b)
Equity funding received from SVB and c) Debt funding received from SVB.
• Start-up firms backed by Silicon Valley accelerator Y Combinator (YC) (Venture Firm) are facing
trouble. Industry experts say the bank’s failure is likely to impact Indian start-ups as it has injected
much uncertainty in the industry.
• Some Indian firms couldn’t timely withdrew their deposits from Silicon Valley Bank because they
didn’t have another US banking account readily available to hold that capital.
 Indian Companies Funding with SVB

S.No. Company Total Funding (USD)

1 Shaadi.com 8,000,000

2 CarWale 9,873,512

3 Asklaila 12,000,000

4 Sarva 12,281,001

5 Games2win Media 13,085,782

6 Loylty Rewardz 28,270,232

7 PubMatic 31,000,000

8 Drip Capital 85,120,000

9 Numerify 88,000,000
 Indian Companies Funding with SVB

S.No. Company Total Funding (USD)

10 TutorVista 102,250,000

11 BlueStone 111,502,585

12 Naaptol 133,305,783

13 Icertis 520,000,000

14 Paytm Mall 808,241,000

15 Paytm 4,637,862,461
 The Silver Lining for Indian Start-ups and Key Takeaways

• As a big financial relief to the Indian Start-ups, the US Government assisted the depositors of the
failed Silicon Valley Bank in getting access to their funds from March 13, 2023.
• US Government also announced to make additional loans available to eligible depository
institutions.
• This issue is expected to be trivial for those start-ups who have deposits only with SVB, as they
can withdraw the amount. However, for startups who have received funding, the situation is
different.
• Indian government is working on ways to shield the start-ups from any economic uncertainty that
may arise due to SVB collapse.
• In this regard, the Union Minister of State for Electronics and Information Technology has
proposed a slew of measures like enabling US fund transfer to Indian banks and development of
innovative credit products like deposit backed credit lines.
 The Silver Lining for Indian Start-ups and Key Takeaways

• According to Aviral Bhatnagar, VC at Venture Highway opined that the impact of SVB turmoil will
not affect India much than the US since start-ups domiciled in India do not have SVB exposure.
• India potentially has 15-20% exposure (out of funded companies) to the US through being
incorporated in the US. This is primarily SaaS companies and YCombinator companies. The ones
that are sub-Series B are likely to have significant SVB exposure.
• Since start-ups who hold only deposit accounts with SVB may not be affected to a great extent,
as they can withdraw the amount to meet expenditures on day to day business operations.
• The start-ups that have received funding through equity route from SVB should not experience
immediate tremors, since those shares may be transferred to the acquiring entity.
• For the start-ups that have received funding in the form of debt capital from SVB, their case may
be little complicated, especially with reference to undrawn capital lines.
 The Silver Lining for Indian Start-ups and Key Takeaways

• The SVB Bank fiasco should serve as a wake up call for Indian startups. No one should take it for
granted that the regulator will always step in, but rather have their own precautions and risk
management in place.
• Indian start-ups needs to diversify heir exposure by having accounts with different banks, as
deposits are insured only up to a certain amount.
• In view of the robust banking system in India, start-ups of India henceforth may keep less money
with US banks and substantial amount with Indian banks.
• Since the situation is much better in India, due to RBI’s monetary policies and its stringent
banking norms.
• In future, there may be drastic change in start-ups scenario in India, as more of start-ups may
open accounts in GIFT City. Going ahead, start-ups may undertake evaluating the option of having
banking operations in GIFT City.
• Indian start-ups needs to develop business models that is sustainable and address the real
problems of business.
The Apocalypse of Credit Suisse
 Brief about Credit Suisse

• Zurich-based Credit Suisse traces its history to 1856, when it was founded to finance the
expansion of Swiss railroads. The company was founded by Alfred Escher on July 5, 1856 and is
headquartered in Zurich, Switzerland.
• Credit Suisse began as a commercial bank in 1856, at a time when Switzerland was first embracing
the industrial revolution. Today Crédit Suisse is one of the Big Three powerhouses of the Swiss
banking industry, along with the Union Bank of Switzerland and the Swiss Bank Corporation. In
that role alone, the bank ranks among the major players in the world financial arena.
• The growth of various industries in Switzerland and the continued expansion of the railroads
provided ample opportunities for Crédit Suisse to grow.
• Credit Suisse played a pivotal role in development of Swiss monetary system, and by the end of
the Franco Prussian War in 1871, Credit Suisse was the largest bank in Switzerland.
• Recently, Credit Suisse had been working to spin off its investment-banking arm as part of an
attempt to move on from a long stretch of scandals and quarterly losses.
 Cracks in Credit Suisse

• First, aggressive investment banking and skewed incentive structures led to

excess risk taking by the sales team.
• Second, Credit Suisse allowed the sales and business development team to
overrule the risk and compliance team, which triggered bad decisions.
• Third, bankruptcy of Greensill, a supply chain financier in March 2021. Credit
Suisse had an exposure of $10 billion. The supply chain receivables were
securitized and converted to bonds and were sold as safe assets to clients. The
bank could recover only part of the funds and might have end up in losses.
• Fourth, despite massive losses of Archegos Capital, the Family Office of Bill
Hwang, Credit Suisse kept on funding the family office heavily, thereby leading to
loss of $5.5 billion in Archegos. Loss from investments in Archegos would have
been lower for Credit Suisse had it exited positions like Goldman Sachs and
Morgan Stanley.
 Cracks in Credit Suisse

• Fifth, the fall in ethics due to greed for slush money. Credit Suisse handled cash
for a cocaine trafficker and is facing criminal money laundering charges.
• Sixth, Credit Suisse has been fined £350 million over the Mozambique tuna
bonds scam, which were loans arranged for the Republic of Mozambique.
• Seventh, Credit Suisse has funded high risk assets like private aircraft and
superyachts for Russian oligarchs and that is in trouble with amidst the Ukraine
war.
 Repercussions

• Investors have been on high alert for signs of contagion following the rapid collapse of California-
based Silicon Valley Bank earlier this month. That led to a selloff in shares of banks around the
world, including Credit Suisse’s.
• The larger and long time rival of Credit Suisse, UBS Group have agreed to buy the bank, thereby
marking the mammoth deal in the global banking system. The purchase consideration stood at
around $3 billion.
• UBS was pushed into the deal by regulators who were eager to curb further panic about the
stability of the banking industry.
• According to Finma, Switzerland’s financial regulator, the aforesaid initiative was necessary to
prevent damage to the Swiss and global financial markets.
• UBS agreed to pay Credit Suisse shareholders 3 billion Swiss francs, or around $3.1 billion, in the
all-share deal. The Swiss government also agreed to backstop 9 billion francs of potential losses
from Credit Suisse’s assets and allowed UBS to wipe out about $17 billion of Credit Suisse bonds.
 What Next?

• Impact on Indian financial markets may be less as they are not as interlinked with global financial
markets as those of some other countries. But there will be a negative shock, possibly leading to a
further slowdown in economic growth.
• Credit Suisse operations in India are limited. However unlike SVB, Credit Suisse is a much larger
global financial entity.
• The positive outcome from takeover of Credit Suisse is awaited. Generally, it is a myth that a
larger capital base can absorb risk. In the case of Credit Suisse too, the takeover by UBS is the
latest example in a long line of desperate attempts to create stability through mergers that have
seen many large European lenders merging since the global financial crisis.
• Desperate attempts imply that takeover deals inked to save collapsing banks have not gone well.
• For instance, public-private emergency rescues resulted in the disappearance of Dresdner Bank
(taken over by Commerzbank) and ABN Amro (which was bought by a consortium of Royal Bank
of Scotland, Fortis, and Banco Santander). Both deals were disastrous for the buying banks and
more public money followed.
• The Dutch government resurrected ABN Amro and the German government still has a stake in
Commerzbank. UBS might well see similar problems from the Credit Suisse takeover.
 Way Forward

• Continuous debacles of leading banks in developed world may be a harbinger of another global
economic crisis, may be of lesser magnitude than what happened in 2008.
• Banks of the countries that witnessed banking failures need to work on CAMELS.
• Corporate Governance, especially financial governance is in doldrums which needs to be
reconnoitred for creating an optimum edifice of corporate and financial governance.
• Banks needs to rework on their both loans and investment portfolios.
• Central banks of US, Switzerland and other developed countries needs to make lending rules
more stringent.
• As mentioned, Indian start-ups should now knock the doors of Indian banks more than foreign
banks due to robust banking structure in India.
• If possible and subject to regulatory framework, start-ups financial information / Annual Reports
should be make accessible to public like those of listed companies, so that stakeholders can be
conversant of the raising and utilisation of funds by start-ups and other significant financial
information.
 Scope for Further Research Study
• How banking policies will shape up in the future in developed countries,
particularly those where bank debacles happened with reference to prevention
of further banking failures may be explored.
• Business sustainability of selected mammoth banks of developed countries
having large exposures to various countries across the globe, especially India
using CAMELS approach, Regression Analysis, Parabolic Trends and other Time
Series Analysis tools, Altman Z-Score Model etc. may be studied to determine the
financial stability scenario of global banking sector and its probable impact on the
Indian banking sector.
• Corporate Governance of selected big global banks may be examined to decipher
the fault lines and determine resuscitating measures. In this regard, Piotroski
Score may be applied which would assist in ascertaining the strength of banks
financial position, a key component of banks corporate governance.
• A comparative study of Global and Indian banking systems may be undertaken by
analysing the factors of ESTEMPLE.
Thanks