US, European banks hit by SVB squall

The Silicon Valley Bank (SVB) ran into trouble when the SVB, funded by venture capitalists, lost $1.8 billion while trying to sell package bonds to meet cash demands from depositors. To make up for the loss incurred in selling the bonds, the bank was to sell $1.8 billion of its stock, and this set off the panic. The SVB lost 60 per cent of its market value, and like a prairie fire, it spread and burned up the market value of other stocks of the banking sector. The contagion was not confined to the American banking sector but it crossed the Atlantic, and European banking sector stocks suffered too on Thursday.

The root cause of the rush on the SVB was the setbacks suffered by the tech sector, and SVB was funding tech sector start-ups. And the market sentiment turned sour with the Fed Reserve raising interest rates to fight inflation. It led from one thing to another as they say in common parlance.

So, are we witnessing a second episode of financial markets meltdown that took place in 2008? There is need to pause and consider the chain of causes that led to the collapse of the too-big-to-fail banks then. The primary cause was the complicated sub-prime crisis where complicated mortgage packages were issued and it created more trouble than it solved.

The trouble grew as the people who borrowed to buy houses could not pay, and the banks that lent money to the borrowers tried to wriggle out by selling the mortgages to other banks. This time round, the failure of the tech start-ups would be confined to a defined segment, though huge funds are involved. The banking sector in the US and in Europe is vulnerable because of inflation and the central banks’ hike in interest rates has introduced an element of volatility. So, the banks took a beating in the markets.

The underlying factor in a banking crisis is the money that is invested in a particular sector and that sector fails to yield enough dividend, then trouble erupts. This time round it is the tech start-ups. There is a sort of a gold rush in the tech sector mainly due to the excitement over Artificial Intelligence (AI) and its products like ChatGPT, as also the excitement over Big Data. Microsoft and Google are in a race, and Meta is engaged in creating a bigger version of a digital universe of its own. And there is the sales pitch that digitalisation will change the kind of work we are engaged and life we live. But it seems inevitable that individuals, organisations, societies may have to recover the simple connect with the natural world around us, and decrease the dependence on the digital universe that is now become like an addiction. It is time to pull back if not pull out.

Many people have been warning for more than a century now that man should not become the slave of the machine, and the same tenet has to be applied to digital technology and all its implies, including AI and robotics. As management experts speak of work-life balance, there is need to emphasise tech and life balance.  The overwhelming obsession with technology, particularly with the digital universe, poses psychological and social problems to children and adults, in schools and workplaces. The economic troubles in the tech universe are not merely economical.

There is need for an open dialogue about the use and abuse of the digital world. We need technology, we need the digital infrastructure to manage many of the things that we do now. The storm caused by the stress in the Silicon Valley Bank should be used as a warning.