It’s time for a lesson in the world of banking and finance, and trust me, it’s not all sunshine and rainbows. As you may have heard, another US regional bank has bit the dust, making it the third one to do so in just two months. That’s right, First Republic Bank has gone down the tubes, just like Silicon Valley Bank and Signature Bank before it. But how did this happen? And why should you care? Let’s dive in.
How First Republic Bank, Silicon Valley Bank, and Signature Bank Failed to Keep Up
First, let’s talk about why these banks failed. It all comes down to interest rates. You see, when interest rates are low, banks tend to invest heavily in bonds, hoping to make a profit down the line. But when interest rates rise, those bond holdings lose value, which leads to losses for the banks. That’s exactly what happened with these three banks. They invested too heavily in bonds, and when interest rates rose, their bond holdings greatly fell in value, causing them to lose money.
But that’s not all. First Republic Bank, in particular, had a high level of uninsured deposits, meaning they had deposits well north of the federally-insured $250,000 per savings account. And when depositors got wind of the bank’s troubles, they pulled out their funds, leading to first-quarter outflows of more than $100 billion that tanked its stock by more than 20%. Yikes.
Why Uninsured Deposits are a Risky Business for Both Banks and Customers
Uninsured deposits are a real risky business, not just for banks but for us customers too! You might be thinking, “Oh well, if the bank goes under and I have uninsured deposits, it’s not my problem,” right? Wrong! When a bank fails, bondholders are some of the last people to get paid, and stockholders? They’re at the end of the line. So if you’ve invested in a bank’s stocks or bonds, you might end up with nothing when the bank goes under. Yeah, you heard that right, nothing.
And it’s not just us customers who should be worried. The FDIC, which is supposed to protect our deposits, also takes a huge hit when a bank fails. When First Republic Bank failed, the FDIC could lose up to $13 billion! And that’s a lot of money, even for a government agency. After the collapse of First Republic Bank, JPMorgan Chase had to step in and buy most of the bank’s assets, paying a whopping $10.6 billion to the FDIC as part of the deal. That’s a lot of cash!
And here’s the real kicker, the collapse of First Republic Bank has got investors worried that more banks could fail in the coming months, causing a financial crisis. And when investors get worried, they start pulling their money out of banks, which can cause a run on deposits.
Twitter and the Downfall of Silicon Valley Bank: How Social Media Impacted the Banking Industry
But it’s not just interest rates and uninsured deposits that caused these banks to fail. According to a research paper, Twitter conversations among investors played a role in the collapse of Silicon Valley Bank in March 2023. That’s right, social media had an impact on the banking industry. The rapid decline in the bank’s stock price on March 9 was accompanied by a sharp rise in the number of tweets mentioning “SIVB,” the ticker symbol for the bank. Trades in the bank’s stock were halted on March 10, the day the bank collapsed. And get this: the research found that shares of banks with a lot of Twitter activity in January and February incurred much larger declines in March.
So, if you’re thinking about investing in a bank, you may want to keep an eye on social media to see what people are saying about it. Who knows, maybe a few tweets could be the difference between a profitable investment and a total loss.
How Silicon Valley Bank’s Collapse Impacted the Indian Startup Ecosystem
You may be wondering, what does a US bank’s collapse have to do with the Indian startup ecosystem? Well, Silicon Valley Bank was known for its work with tech startups, including Indian ones. The bank had a presence in India and was an important player in the country’s startup ecosystem.
In fact, Silicon Valley Bank had invested in some of India’s most successful startups, including Flipkart, Ola, and InMobi. And when news of the bank’s collapse broke, Indian startups were understandably concerned. After all, if a bank like Silicon Valley Bank could fail, what was to stop others from following suit?
In addition to concerns about future investment opportunities, Indian startups were also worried about the impact of the bank’s collapse on their existing investments. More than 60 YC-funded Indian startups have over $250,000 stashed away in accounts with Silicon Valley Bank. As it turns out, those worries were not unfounded.
Bank failures and De-dollarisation
Argentina just announced that it will pay for Chinese imports in yuan instead of the US dollar, and people are talking about “de-dollarisation.” What’s that, you ask? Well, it’s about reducing dependence on the US dollar as a medium of exchange or reserve currency. It’s not a new idea, but it’s become more popular in recent years, especially since Russia was cut off from the international dollar-trading systems due to sanctions.
But why do countries want to reduce their dependence on the US dollar? Well, the US dollar has dominated global trade and capital flows for decades, ever since it became the leading financial power after World War I, displacing the pound sterling as the international reserve currency. The Bretton Woods Agreement in 1944 further established the US dollar as the dominant international currency. But the US dollar has lost purchasing power since 1971 when President Nixon ceased the direct convertibility of US dollars to gold. And now, many nations are seeking alternatives to reduce their dependence on the US dollar and financial system.
And now, the collapse of US banks has made this even more important. First the Silicon Valley Bank, then the Signature Bank, and now the First Republic Bank. In fact, the First Republic was on the brink of collapse way before but was saved by a group of American lenders who deposited tens of billions of dollars to stop the bleeding. Credit Suisse was also facing collapse, but Swiss authorities announced a backstop, and UBS agreed to buy the bank in an emergency rescue deal. The rescue cost $3.2 billion in direct support, and $54 billion in central bank’s emergency cash. In total, the Fed loaned $318 billion to the financial system, half of what was extended during the global financial crisis.
Impact on India
Now, you might be wondering how this affects India. Well, as it turns out, the collapse of US banks and de-dollarisation could actually be beneficial for the booming Indian startup ecosystem. Let me explain.
First of all, the collapse of US banks is bad news for everyone. When banks fail, it can lead to a recession, job losses, and economic turmoil. But it can also create opportunities for new players to enter the market. In India, for example, startups are already starting to fill the void left by traditional banks. Digital lending platforms, such as Paytm, have become increasingly popular in recent years, as they offer loans to individuals and small businesses that are unable to get them from traditional banks. Indian fintech startups, such as Paytm and PhonePe, have already made significant inroads in the Indian market, and they could expand their reach globally in the wake of the collapse of US banks.
But that’s not all. The de-dollarisation trend could also benefit Indian startups. As more countries reduce their dependence on the US dollar, they are looking for alternative payment options, such as settling international transactions in local currencies. India is already ahead of the curve on this one, with the Rupee trade settlement already being used by 18 countries. The BRICS countries have also discussed increased cooperation, including a common currency for trade. This means that Indian startups could have easier access to global markets, as they can transact in their local currency without having to worry about currency fluctuations and exchange rates.
Wait, there’s more! The collapse of US banks could also lead to a shift in investor sentiment. Traditionally, US investors have dominated the startup scene, but with the collapse of major US banks, investors may start to look for opportunities elsewhere. India, with its rapidly growing startup ecosystem, could become an attractive destination for international investors looking for new opportunities. This could bring in more funding, expertise, and partnerships, which could help Indian startups scale and grow faster.
Furthermore, the collapse of US banks could also lead to a shift in talent migration. In the past, many talented Indian entrepreneurs and engineers have migrated to the US to work for Silicon Valley startups. However, with the collapse of major US banks, the job market and funding opportunities in the US may become less attractive, leading more talent to stay in India and build local startups.
Overall, while the collapse of US banks and de-dollarisation are concerning developments for the global economy, they could present opportunities for Indian startups to thrive. By leveraging their local currency and innovative solutions, Indian startups could become major players in the global market, attracting more investors, talent, and partnerships.
In addition to the benefits mentioned, the collapse of US banks and de-dollarisation could also create a more level playing field for Indian startups. Historically, US startups have had an advantage due to their access to capital and networks, but with the US financial system in turmoil, this advantage may be eroded. This could provide an opportunity for Indian startups to compete more effectively on a global stage.
The collapse of US banks and de-dollarisation are complex developments with far-reaching implications for the global economy. While they pose significant challenges, they could also present opportunities for Indian startups to thrive and compete on a global stage. By leveraging their local currency, innovative solutions, and talented workforce, Indian startups could become major players in the global market, attracting more investors, talent, and partnerships.