A BRIEF ANALYSIS OF THE IMPACT OF SILICON VALLEY BANK'S FAILURE ON THE LATAM ECOSYSTEM
Bridges Business Builder LLC
M&A | Valuation I Fundraising | Equity Research for low-cap & mid-cap companies. #bridgesbiz
The recent failure of Silicon Valley Bank (SVB) has sent shockwaves throughout the financial world. This quick and unexpected collapse has been described as a textbook example of a classic bank run. The resulting failures at SVB and Signature were two of the three largest in U.S. banking history, following the collapse of Washington Mutual in 2008.
Despite record levels of excess reserves held by the banking industry, our team believes that the failure of SVB can be attributed to two key risks: interest rate risk and liquidity risk. The aggressive increase in interest rates by the Federal Reserve to tame inflation has led to a jump in the yield on debt. This has caused the market value of previously issued debt to plummet, especially for longer-dated debt. Additionally, customers of SVB were withdrawing their deposits beyond what it could pay using its cash reserves, forcing the bank to sell $21 billion of its securities portfolio at a loss of $1.8 billion. This led to a drain on equity capital, which led the lender to try to raise over $2 billion in new capital.
The impact of SVB's collapse could extend beyond the U.S. market and affect Latin America's ecosystem, particularly if it leads to sustained risk-off sentiment in markets. Countries with large current account deficits, which are the most dependent on foreign capital inflows, would be the hardest hit and likely see sharp falls in their currencies. This could include Mexico, given its close ties to the U.S. The collapse of SVB has left tech startups in Latin America struggling to find banking alternatives, as the bank was one of the few that offered much-needed dollar accounts and catered to the specific needs of the sector.
Moreover, the impact of the SVB collapse on Latin American startups is still unfolding, and there is still uncertainty about what will happen. In 2020, SVB closed the Latin America Growth Lending Fund, a $30 million venture and growth debt fund with Partners for Growth (PFG) and IDB Invest. The fund's objective was to provide capital to help emerging growth companies in Latin America and the Caribbean. The collapse of SVB could lead to a reduction in venture capital investments in startups in the region, especially if risk aversion hardens in the U.S.
In conclusion, the failure of SVB has raised concerns about the risks associated with interest rate and liquidity risks in the banking industry, as well as the impact of the collapse on the LATAM ecosystem. As the impact of SVB's collapse continues to unfold, it is essential to closely monitor its effects on Latin American startups and the broader financial ecosystem.
Keep In touch with our team to know more about financial analysis or if you need to develop a strategy to navigate this economic uncertainty
领英推荐